Investment Insights -
Dividends yield results
NZ Funds has continuously managed New Zealand shares in-house since 1992. As a result, we have one of New Zealand’s longest standing domestic share investment track records. Today, New Zealand shares remain a key driver of returns for NZ Funds clients’ growth and inflation portfolios.
One aspect of the New Zealand share market which makes it such a rich hunting ground to invest is the dividend yield of New Zealand companies when compared with other global markets. In this article we discuss why dividend paying companies are an attractive investment. We will also review some of our favourite New Zealand companies that clients are currently invested in.
Dividends form a significant component of a company’s total return
According to EY, Australia and New Zealand are two of only a handful of countries with a dividend imputation regime. By substantially removing the double taxation, EY believes the regime in New Zealand replicates a near tax-free marketplace and, accordingly, imputation plays a significant role in fostering high dividend pay-outs.
A company’s dividend yield measures the cash return investors can expect. It is calculated by dividing the dividends a company pays over a year by its share price. Research published by academic Robert Arnott demonstrated the significance of this income-stream by studying the past 200 years of returns of the United States share market. Arnott found that the dividend component clearly dominated, making up 5.0% of the 7.9% per annum returns.
Selecting shares that pay a dividend – dividend paying process
Making dividends a component of a share selection strategy has several important benefits.
First and foremost, a dividend paying investment process leads to the earning of attractive returns.
Second, dividends have a bias toward quality companies, because only companies with a reasonable level of financial health generate ongoing cash earnings and can sustainably afford to pay out these earnings.
Third, the approach is well suited to the relatively high-yielding and tax-efficient New Zealand and Australian share markets.
Finally, dividends can act as a cushion in the event of a market sell-off. As the company’s share price declines, its dividend yield increases, making it more attractive to new investors reducing the extent of the decline.
It’s not that easy
A high dividend yield does not necessarily represent a good investment opportunity but, instead, could indicate above average risk or limited growth prospects. The business stability and growth prospects of a high dividend paying company need careful consideration. A good example is Sky TV, a company renowned for paying a high dividend. Recent disruption of the satellite TV market means Sky TV’s dividend has now been suspended. Arguably, the dividend could have been better used developing new technology.
Furthermore, there are some companies that investors would prefer NOT to pay a dividend. This is the case when the company is growing fast. It is more beneficial to shareholders if the company’s earnings are reinvested back into the business, rather than for a dividend to be paid. The a2 Milk Company’s growth into the United States and China’s milk and infant formula markets is a great example of this. In fact, when a high growth company commences paying a dividend, it can be a signal that its rate of growth might be slowing.
Overall, shares with higher dividend yields tend to outperform. This is a strong argument for the use of dividends as a metric for investment. Moreover, earnings of companies that pay dividends are less volatile and more predictable than those companies that do not.
Portfolio positioning
The domestic share strategy run by NZ Funds since 1992 has returned 12.5% per annum (before fees and tax) since inception. As an active manager, NZ Fund’s domestic share strategy looks to identify and invest in companies that pay a strong sustainable dividend (see the examples below the graph), or companies that are growing sustainably fast and have chosen not to pay a dividend.
Although New Zealand shares have underperformed global shares year to date, given the uncertainty of the global economy and the potential for a second wave of COVID-19, they provide a defensive exposure to growth while paying a strong dividend yield. NZ Funds’ clients are well positioned to benefit from New Zealand’s sustainable dividend stream in what is an otherwise an uncertain environment.
One aspect of the New Zealand share market which makes it such a rich hunting ground to invest is the dividend yield of New Zealand companies when compared with other global markets. In this article we discuss why dividend paying companies are an attractive investment. We will also review some of our favourite New Zealand companies that clients are currently invested in.
Dividends form a significant component of a company’s total return
According to EY, Australia and New Zealand are two of only a handful of countries with a dividend imputation regime. By substantially removing the double taxation, EY believes the regime in New Zealand replicates a near tax-free marketplace and, accordingly, imputation plays a significant role in fostering high dividend pay-outs.
A company’s dividend yield measures the cash return investors can expect. It is calculated by dividing the dividends a company pays over a year by its share price. Research published by academic Robert Arnott demonstrated the significance of this income-stream by studying the past 200 years of returns of the United States share market. Arnott found that the dividend component clearly dominated, making up 5.0% of the 7.9% per annum returns.
Selecting shares that pay a dividend – dividend paying process
Making dividends a component of a share selection strategy has several important benefits.
First and foremost, a dividend paying investment process leads to the earning of attractive returns.
Second, dividends have a bias toward quality companies, because only companies with a reasonable level of financial health generate ongoing cash earnings and can sustainably afford to pay out these earnings.
Third, the approach is well suited to the relatively high-yielding and tax-efficient New Zealand and Australian share markets.
Finally, dividends can act as a cushion in the event of a market sell-off. As the company’s share price declines, its dividend yield increases, making it more attractive to new investors reducing the extent of the decline.
It’s not that easy
A high dividend yield does not necessarily represent a good investment opportunity but, instead, could indicate above average risk or limited growth prospects. The business stability and growth prospects of a high dividend paying company need careful consideration. A good example is Sky TV, a company renowned for paying a high dividend. Recent disruption of the satellite TV market means Sky TV’s dividend has now been suspended. Arguably, the dividend could have been better used developing new technology.
Furthermore, there are some companies that investors would prefer NOT to pay a dividend. This is the case when the company is growing fast. It is more beneficial to shareholders if the company’s earnings are reinvested back into the business, rather than for a dividend to be paid. The a2 Milk Company’s growth into the United States and China’s milk and infant formula markets is a great example of this. In fact, when a high growth company commences paying a dividend, it can be a signal that its rate of growth might be slowing.
Overall, shares with higher dividend yields tend to outperform. This is a strong argument for the use of dividends as a metric for investment. Moreover, earnings of companies that pay dividends are less volatile and more predictable than those companies that do not.
Portfolio positioning
The domestic share strategy run by NZ Funds since 1992 has returned 12.5% per annum (before fees and tax) since inception. As an active manager, NZ Fund’s domestic share strategy looks to identify and invest in companies that pay a strong sustainable dividend (see the examples below the graph), or companies that are growing sustainably fast and have chosen not to pay a dividend.
Although New Zealand shares have underperformed global shares year to date, given the uncertainty of the global economy and the potential for a second wave of COVID-19, they provide a defensive exposure to growth while paying a strong dividend yield. NZ Funds’ clients are well positioned to benefit from New Zealand’s sustainable dividend stream in what is an otherwise an uncertain environment.
Source: RBNZ, Bloomberg. Dividend yield series shows the dividend yield received from the New Zealand market over the previous year. Data used NZSE40 Index (1999 - 2001), NZX 50 Portfolio Index (2001 onwards). For more information please contact NZ Funds.
For more information please contact NZ Funds.
For more information please contact NZ Funds.
NZ Funds’ high-conviction New Zealand companies
Chorus (160% 5-year return, 4.45% dividend yield)
Chorus is New Zealand’s largest telecommunications infrastructure company. It is building the country’s fixed Ultra Fast Broadband telecommunications network. Benefiting greatly from the digitisation of the economy, Chorus provides fixed network access services to a range of access-seekers, including Spark and Vodafone. Chorus is experiencing what the CEO of Microsoft stated back in March, “COVID-19 has caused 3 years of digitization in 3 months."
Fisher & Paykel Healthcare (367% 5-year return, 1.08% dividend yield)
Fisher & Paykel Healthcare is a manufacturer, designer and marketer of products and systems for use in respiratory care, acute care, and the treatment of obstructive sleep apnea. Based in New Zealand, their products and systems are sold in around 120 countries worldwide. Fisher & Paykel is a great example of a company that has strong growth but still consistently returns cash to shareholders via dividends.
Meridian Energy (123% 5-year return, 4.61% dividend yield)
As the country’s main electricity generator and a significant retailer, Meridian is New Zealand’s largest electricity company. The company generates approximately 30% of New Zealand’s electricity from 100% renewable sources. The recent weakness in Meridian’s share price, caused by Rio Tinto threatening to close the smelter, has provided an opportunity to reinvest in a long-term sustainable business.
Spark (68% 5-year return, 6.24% dividend yield)
Spark is a retailer of fixed and mobile voice services and operator of a mobile network. In 2014 they transformed the business into also being a provider of digital services, including broadband, entertainment media and cloud computing. Spark is focused on creating a wireless future lead by the launch of 5G mobile and wireless broadband services At the same time the company has committed to paying the majority of its profit out as dividends.
The a2 Milk Company (2469% 5-year return, n/a)
The a2 Milk Company’s stated mission is to pioneer the scientific understanding of the A2 protein type so more people can enjoy the nutritional benefits from milk. As discussed above, The a2 Milk Company is a good example of a situation where shareholders prefer the company to reinvest earnings back into the company than pay it out as dividends.
Chorus (160% 5-year return, 4.45% dividend yield)
Chorus is New Zealand’s largest telecommunications infrastructure company. It is building the country’s fixed Ultra Fast Broadband telecommunications network. Benefiting greatly from the digitisation of the economy, Chorus provides fixed network access services to a range of access-seekers, including Spark and Vodafone. Chorus is experiencing what the CEO of Microsoft stated back in March, “COVID-19 has caused 3 years of digitization in 3 months."
Fisher & Paykel Healthcare (367% 5-year return, 1.08% dividend yield)
Fisher & Paykel Healthcare is a manufacturer, designer and marketer of products and systems for use in respiratory care, acute care, and the treatment of obstructive sleep apnea. Based in New Zealand, their products and systems are sold in around 120 countries worldwide. Fisher & Paykel is a great example of a company that has strong growth but still consistently returns cash to shareholders via dividends.
Meridian Energy (123% 5-year return, 4.61% dividend yield)
As the country’s main electricity generator and a significant retailer, Meridian is New Zealand’s largest electricity company. The company generates approximately 30% of New Zealand’s electricity from 100% renewable sources. The recent weakness in Meridian’s share price, caused by Rio Tinto threatening to close the smelter, has provided an opportunity to reinvest in a long-term sustainable business.
Spark (68% 5-year return, 6.24% dividend yield)
Spark is a retailer of fixed and mobile voice services and operator of a mobile network. In 2014 they transformed the business into also being a provider of digital services, including broadband, entertainment media and cloud computing. Spark is focused on creating a wireless future lead by the launch of 5G mobile and wireless broadband services At the same time the company has committed to paying the majority of its profit out as dividends.
The a2 Milk Company (2469% 5-year return, n/a)
The a2 Milk Company’s stated mission is to pioneer the scientific understanding of the A2 protein type so more people can enjoy the nutritional benefits from milk. As discussed above, The a2 Milk Company is a good example of a situation where shareholders prefer the company to reinvest earnings back into the company than pay it out as dividends.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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