In building an investment strategy to provide independent income streams for life after work we continue to analyse different asset returns given the impact of inflation is often underestimated. Even with a “low” 2.5% pa inflation rate over 20 years, this will result in a 60% rise in the cost of living. To put this into context the average life expectancy of a 65 year old male is > 20 years with a > 50% chance one member of a healthy couple will live past 90 years, so protecting against inflation is vital.
Combining this reality with the current 10 year Australian government bond yield at 2.80% pa it is critical the investment strategy carefully links with investor life expectancy and is not unduly influenced by the potential for short term asset price movements.
With this in mind the following charts update the current market dynamics including:
- Dividends tend to rise in line with company earnings and have been less volatile than month to month asset (or share) price movements.
- Since the late 1980’s Australian companies paid consistent and reliable dividends equal to approximately 75% of their earnings.
- In the year to 30 June 2015 the top ASX200 companies in aggregate increased their dividend payout by 4.7% compared to the previous year.
- The difference between income generated on fixed income and bonds compared to the largest 300 listed businesses in Australia is the widest margin for many years as illustrated below.
- It’s important to remember front page headlines and talk back radio generally focuses on financial news when there is a dramatic negative price movement. Rarely does the topic of dividends get a mention but when it does it is often put deep in the paper like this September 2015 article on page 67.