Dividends – What They Are And The Benefits To Your Portfolio
On your journey to creating financial freedom through investing, I’m sure you’ve heard the terms dividend and dividend yield and might be wondering what they mean!
Dividends are cash payments paid to shareholders from company profits. The company is returning earnings to shareholders rather than using it for other means.
The dividend yield shows how much a company pays to you relative to the share price.
For example if the dividend yield is 3%, for every $1,000 you have invested you will receive $30 in dividends.
For every $100,000 you will receive $3,000 in dividends.
A lot of companies have a dividend re-investment plan (DRP), allowing you to automatically reinvest all or a portion of your dividends into new shares in the company. Some companies offer these shares at a discount to the current market rate.
When you look at companies, there will be varying dividend yields and may be quite a significant difference. For example over the past 5 years, Fortescue Metals Group, an Australian Iron Ore company had a minimum dividend yield of 1.83% and a maximum dividend yield of 25.43%, a whopping 23.60% difference.
On 21 December 2021, Fortescue Metals Group (FMG) had a trailing dividend yield of 18.55%, by 21 June 2022 it was 17.38% and 20 Dec 2022 10.55%*. As you can see the trailing dividend yield has varied a lot over that period.
If we look at the Commonwealth Bank of Australia (CBA), over the past 5 years, it had a minimum dividend yield of 0.00% and a maximum dividend yield of 6.57%, a 6.57% difference.
On 21 December 2021, Commonwealth Bank of Australia (CBA), had a trailing dividend yield of 3.75%, by 21 June 2022 it was 4.55% and 20 Dec 2022 3.85%*.
The dividend payout ratio is the number of listed companies that paid dividends.
In Australia, the average dividend payout ratio between 2005 and 2015 was 67% (this is the number of listed companies that paid dividends). For the same period, the UK dividend payout ratio was 60%, Japan 57%, Europe 55%, Canada 52% and the United States 48%. As you can see Australia has a higher payout ratio than other developed nations.^
In 1987, Australia introduced dividend imputation or franking credits, this is where a shareholder receives a credit for the tax the company has already paid on that income. This has boosted dividend payout ratios. Note this does not mean total returns (capital growth and income) were higher.
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This is general information and for educational purposes only.
