Returning dividends improve Aussie share appeal

Australian shares have shown an improvement and dividends are returning to more normal levels after increasing for the first time in 12 months, according to experts from Russell Investments and Legg Mason.

This will put pressure on companies to pay out their cash reserves, meaning overall yields are competitive against term deposits and the appeal of income based strategies is increasing, according to Scott Bennett, portfolio manager at Russell Investments.

“We are seeing a turning point for dividends. As a result, we expect a rise in income-based strategies as the market heads into a period of lower growth where a greater proportion of investors’ total returns could be driven by dividend income,” Bennett said.

Income strategies would be particularly useful for self-managed super fund (SMSF) investors as they begin implementing their transition to retirement strategies, Bennett said.

Legg Mason Australian Equities chief investment officer Reece Birtles said the Australian equity market still factored in strong growth in earnings per share, despite 2011 forecasts being downgraded from 25 per cent to 20 per cent during the recent reporting season.

The recent reporting season showed record free cashflows higher than the 2007 peak, a recovery in actual earnings and stronger balance sheets with reduced levels of debt, Birtles said.

Birtles said the updated outlook favoured an investment strategy with a bias towards cyclical stocks that have exposure to the expected strong profit growth.