Keeping an eye on the dividend
Australian investors love their dividends, especially fully-franked dividends that can offer an appealing effective rate of income compared with fixed-interest alternatives, and it’s easy to understand why.
A lot of fund managers – ourselves included – focus more on total return, with the idea being that chasing income at the expense of capital growth is not the right long-term approach, and it’s important to take both components of return into account when making investment decisions.
Having said that, even investors who focus on total returns need to be mindful of the power of the dividend and its ability to influence share prices. In simple terms, if a dividend-paying stock is going to be well-supported by a large section of the investment community then that support may well flow through into an elevated share price, and stronger total returns than might otherwise be expected.
One aspect of this can be seen in the behaviour of dividend paying stocks around the time the stock goes ex-div. The chart below shows the total return for a sample of ASX-listed stocks around the dividend ex-date (day 0), with interim dividends shown in black and final dividends shown in red.
What the chart says is that, particularly for final dividends, stocks tend to outperform in the weeks leading up to the ex-date. Presumably this is because a lot of investors are reluctant miss out on the dividend by selling. Also, this analysis ignores franking credits and so the effect is even more pronounced for an investor who can utilise the credits.
Source: MIM analysis
As total-return focused investors, we try to be unemotional about dividends, and dispassionate about particular stocks. However, if we find in July or August that a dividend-paying portfolio stock has become expensive and needs to be culled from the portfolio, well, maybe we can look on it a little more kindly. At least until September.
Tim identifies why investors who are not chasing income still need to be mindful of the power of the dividend by showing us its ability to influence share prices. Click To Tweet
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
