Over the five-year period ending July 31, Australian high-yield shares delivered an average return of 9.5 per cent a year, including dividends. That’s pretty good, but over the same period US shares delivered a significantly higher return of 21.2 per cent a year.
Sure, there are lower dividends with the US shares (which are readily accessible on the ASX through exchange traded funds), but the total return was significantly higher and an investor could have cashed in some gains to supplement income.
International small companies gave a higher return, at 22.43 per cent a year.
Many SMSF trustees, especially those in retirement, have a blinkered focus on high-yielding shares. However, if they are prepared to include some additional asset classes in their portfolios along with their high-yielding shares, they may reduce their concentration risk and potentially increase their returns over time as well.
In my last article, I looked at what really drives sharemarkets. Over the 20th Century periods of optimism and pessimism flattened each other out, and we were left with the 100-year return on markets being equal to the business earnings.
Business earnings are either distributed as dividends, or reinvested back into the business to improve the business and provide long-term growth.
That is why investors should consider the expected total returns from an investment, and not just look at income (dividends), before deciding whether to buy, sell or continue holding that investment.
Traditionally a well-run business in Australia would pay no more than half of their business profit out as dividends. But what does the future hold if actual profits are going to be harder to come by in the next decade. Should we not expect a prudent manager to reduce dividends?
That may be the right thing to do but a CEO’s bonus or even their job may be dependent on maintaining high dividends to keep shareholders happy in the short term. Human nature will mean that the CEO will be tempted to do that for their own personal reasons.
They may end up distributing 100 per cent of their profit as dividends, reinvesting nothing to ensure the long-term prosperity of that business. Is that really in the long-term best interests of shareholders, or do we not care?
Some CEOs may end up borrowing money to pay a sufficiently attractive dividend, just to look good and keep the share price buoyant on their watch. This is really a corporate trick more than prudent management. Yet many investors will be tricked, not look too closely and just watch the dividends come in, hoping that the party will continue.
The fundamentals haven’t changed. In my opinion, there are increasing risks for people who choose shares solely based on their dividend yield, if they don’t also consider what’s going on with the overall business.
We have been through a “golden age” of falling interest rates basically since 1990, which is extraordinary. From here, GDP growth is likely to be slow. Disruptive technologies mean that large western companies may struggle to maintain, let alone grow their profits, and they may lose ground to emerging markets over the next decade.
Of course, it’s not all doom and gloom, because while some traditional businesses will struggle, there are plenty of new areas to invest in, which could do very well.
In just three years, there has been a dramatic increase in the range of sub-asset classes available on the ASX which investors could include as part of their portfolio, to potentially increase total fund returns and reduce risk.
Maybe it’s time to do a proper review of your investment strategy, and not just pay lip service to it for compliance reasons. What could you be including in your portfolio?
Nick Shugg is the chief executive of SMSF Benchmarks, which publishes the Asset Class Performance Table each month, which readers of The Rub can subscribe to for FREE for the rest of the year at our website www.smsfbenchmarks.com.au
