Income-seeking investors should be wary of buying Australian equities despite their strong dividend payouts over recent years, says State Street Global Advisors (SSGA).
In a note to investors, SSGA said Australia’s equity market is one of the highest yielding in the developed world, and its “perceived reliability” could mistakenly cause some investors “to think of the market as almost bond-like”.
“This is a potentially dangerous misunderstanding: the capital value of an equity security is far more at risk than a bond, furthermore, unlike bond coupon payments, dividend payments are not fixed,” SSGA said.
The firm cautioned that data from the past five years shows that payout ratios in aggregate have climbed, while dividend yields held steady.
“This reflects a period during which resource companies and, to a lesser extent, banks held their dividends unchanged while experiencing a fall in earnings,” SSGA said.
For Australian market dividend yields to be maintained at the current level, SSGA warned, earnings need to improve since current payout ratios “cannot increase much further, and probably need to come down”.
“There is no guarantee that last year’s dividend payment will be repeated this year, or even that forecast dividends from sell-side analysts will be paid this year," SSGA said.
“A strategy of blindly buying companies with the highest reported dividend yield could expose investors to some high-risk securities."
SSGA added that while investing for dividends “may have long-term merit”, a different approach was needed by investors looking for short-term capital stability.