Belle Chang
Henry Morrison-Jones, CFA
Sayad Reteos Baronyan, PhD
- Australia has long been recognised for having the highest average dividend yield among global markets. However, this yield has been on a downward trend since 2022.
- The Financials and Basic Materials industries, which have been the main contributors to the historically high dividend yield of Australia, have both seen a recent reduction in yields.
- For Financials, dividend payout ratios have remained relatively stable since 2022. Net margins for Financials have narrowed, but EPS has been sustained thanks to major banks’ substantial share buybacks. If the Reserve Bank of Australia (RBA) eases monetary policy in 2025, improved earnings could lead to higher dividends and increased yields for Financials.
- For Basic Materials, the decline in yield has been a function of a falling dividend payout ratio for the industry. The earnings outlook for the industry remains uncertain due to weaker demand for commodities, like iron ore and copper from China.
Over the past decade, Australia’s financial landscape has been marked by notably high dividend yields, making the country a key focus for income investors. Even for those not targeting Australia directly, the market’s high weighting within the FTSE Developed ex North America High Dividend Yield Index (12% as of August 2024) has also made Australia an important market for global income investors. As highlighted in Figure 1, FTSE Australia’s dividend yield has historically had an outsized impact on the index’s total return versus the broader Asia Pacific market. Over the last 10 years to 31 August 2024, FTSE Australia has seen a price return of 7%, but a total return of 64%, resulting in a total impact from dividends of 56%. This compares to a total impact from dividends over the last 10 years of 39% for FTSE Asia Pacific.
FIGURE 1: HIGH DIVIDEND YIELDS HAVE MADE THE TOTAL RETURN OF FTSE AUSTRALIA ATTRACTIVE VS THE REGION (IN USD TERMS)
FTSE Australia vs FTSE Asia Pacific Return (Rebased)
Backed by Australia’s dividend imputation system, which allows companies to pass on tax credits to shareholders, FTSE Australia has delivered the highest average dividend yield in the Asia-Pacific region over the last ten years, largely thanks to the country’s high yielding Basic Materials and Financials industries. Basic Materials companies, buoyed by stable commodity prices, maintained high payouts, while financial institutions, rebounding from the global financial crisis, increased dividends, reflecting improved profitability and robust balance sheets.
However, Australia’s dividend yield outlook has recently shifted. After peaking at 5.3% in 2022, the yield on the FTSE Australia Index has declined to 3.8%, as of August 2024. In contrast, markets like Hong Kong, Singapore and Indonesia now offer higher yields (Figure 2).
FIGURE 2: DIVIDEND YIELDS OF FTSE AUSTRALIA VS APAC MARKETS (IN USD TERMS)
Dividend Yields Current vs 10y Range
The mechanism of dividend yields
To assess the key drivers of the recent decline in Australia’s dividend yield, we first look at the sub-components of dividend yield. For any company, the dividend yield can be rewritten as a function of its earnings yield and its payout ratio. Fluctuations in dividend yield can then be explained by changes in either of these two subcomponents:
The earnings yield can be thought of as a valuation component, given that it is the inverse of Price to Earnings (P/E).
In Australia’s case, apart from a recent uptick in August of this year, the payout ratio has been consistently below its 10-year average since February 2022. Meanwhile, valuations have turned more expensive, placing downward pressure on yields. Over the past two years, the FTSE Australia index has seen a total return of more than 20% (see Figure 1) while earnings per share (EPS) for the index has exhibited significant volatility and been on a downward trajectory since January 2023. This combination of rising share prices and volatile earnings has resulted in an increase in the trailing P/E. Consequently, elevated valuations and diminished earnings appear to be the primary factors behind the declining dividend yields. Australian firms have not necessarily reduced their dividend payouts on average, rather, lower EPS coupled with higher equity prices have driven the yields down.
FIGURE 3: FTSE AUSTRALIA - DIVIDEND YIELD AND EPS DECREASED, WHILE THE PAYOUT RATIO REBOUNDED FROM LOWS
FTSE Australia dividend yield vs dividend payout ratio and EPS
FIGURE 4: VALUATIONS IN AUSTRALIA HAVE TURNED MORE EXPENSIVE
FTSE Australia dividend yield vs P/E ratio
At an industry level, the Australian equity market is notably concentrated, with Financials and Basic Materials comprising 36% and 17% of the market, respectively. These industries not only dominate market capitalisation but also significantly contribute to the dividend payouts.
FIGURE 5: FINANCIALS AND BASICAL MATERIALS HAVE THE LARGEST WEIGHTS IN FTSE AUSTRALIA INDEX
FTSE Australia industry weight
Over the past decade, Financials have delivered an average dividend yield of 5.1%, while Basic Materials have offered 5.0%. Recently, however, these yields have declined to 4.1% for Financials. The yield for Basic Materials is higher at 5.3%, but significantly lower than the peak level of 9.4% in 2022.
Although industries such as Energy, Telecommunications, and Utilities also provide high dividend yields, their relatively small index weights limit their overall impact. Conversely, Health Care, despite its larger size in the universe, typically offers lower dividend yields due to its industry characteristics. Below, we discuss what a change in dividend yield is telling us about the trend of Financials and Basic Materials – the major contributors to Australia’s dividend yield.
FIGURE 6: DIVIDEND YIELDS OF AUSTRALIA’S LARGEST FIVE INDUSTRIES?
Dividend yields of Australia's largest 6 industries
Financials:?
Following the Covid-19 outbreak, dividend yields for Financials experienced a sharp decline but have since stabilized. Part of this decline can be attributed to a fall in the industry’s payout ratio, which decreased from approximately 80% in 2019 to around 68% in August 2024. However, increasing valuations have also played a role in the industry’s declining dividend yields. During the pandemic, trailing P/E ratios for Financials surged on the back of weaker EPS and, although they have moderated somewhat since, valuations for the industry remain elevated and have continued to climb since 2022.
FIGURE 7: DIVIDEND PAYOUT RATIOS ARE LOWER THAN HISTORICAL LEVELS
Dividend payout ratios of major Australia industries
FIGURE 8: EPS DECREASED FOR BASIC MATERIALS BUT INCREASED FOR FINANCIALS
EPS of major Australia industries (AUD)
In 2021 and early 2022, Australian Financials enjoyed high net margins, buoyed by robust housing loan growth in a low-interest rate environment thanks to the country’s positive upward-sloping yield curve (long-end loan yields higher than short-end funding yields for banks). Over this period, EPS remained stable and even saw an uptick in the second half of 2021. However, as the RBA raised rates from 0.10% to 4.35% in 2023, loan growth slowed, and financial firms’ margins compressed as the country’s yield curve flattened. As a result, Australian Financials and Real Estate stocks, which had peaked from higher levels in 2021, were rangebound throughout 2022 and 2023 and found themselves in a less stable earnings environment.
FIGURE 9: NET MARGIN FOR AUSTRALIA’S FINANCIALS COMPRESSED SINCE RBA HIKED RATES
Net margin for Australia Financials stocks
FIGURE 10: AUSTRALIA BANK LOAN GROWTH SLOWED IN 2023, BUT HAS REBOUNDED IN 2024
Bank loan growth y/y
In 2024, a reversal of fortunes emerged for Australian Financials. With market expectations leaning towards rate cuts by the RBA, Financials stock surged over 25% YTD as of August in US dollar terms. Financials also posted unexpectedly strong earnings results, buoyed by a rebound in loan growth and a slight easing in deposit competition. Share buybacks further bolstered EPS, particularly in the banking sector.
FIGURE 11: MARKET EXPECTATIONS FOR RBA RATE CUTS HAVE RISEN
10y AGB yield vs FTSE Australia Financials Index (USD)
Basic Materials:?
Despite surging in 2021, the dividend contribution from Basic Materials began to decline markedly in 2022, reducing the aggregate Australian dividend yield. During this period, the payout ratio for the industry also dropped from 90% to 60%. This shift was primarily due to an increase in EPS following the rally in commodity prices amid the global economic recovery and expectations of China’s rebound post Covid-19. Over this period, net income for the industry grew at a faster pace than the dividends paid out, causing the payout ratio to decline, despite the rally.
However, since 2023, demand for metals has waned due to China’s economic slowdown, and commodity prices have become volatile. This volatility has negatively impacted the earnings of Australia’s Basic Materials, again impacting payout ratios - this time due to weak earnings and a drop in actual dividends paid out, unlike in 2022 when strong earnings but stagnant dividends paid were the issue. Consequently, data shows that both dividend payout ratios and EPS have declined over the past two years. For instance, during its recent Q4 2024 results, BHP, the largest firm in Australia’s materials industry, announced cuts to both its full year dividend and its payout ratio by USD 0.06 and 6%, respectively.
FIGURE 12: COMMODITY PRICES FELL, DRAGGING THE SHARE PRICES OF BASIC MATERIALS
Return - Australia Basic Materials Index vs Commodities (USD, Rebased)
In summary,?
Financials and Basic Materials are pivotal to Australia’s dividend yields. For Financials, market expectations are for the RBA to initiate rate cuts in 2025, driven by easing inflation pressures. If the RBA begins to ease, a steeper yield curve would likely be positive to Banks’ net interest margins, resulting in a more stable earnings environment. This could encourage Australian banks to increase their payout ratios and consequently increase their dividend yields. However, we note that if Financials’ stock prices rally on the back of these expectations, then higher valuations may temporarily offset the effect of these higher payout ratios, temporarily lowering dividend yields in the process. In contrast, the earnings outlook for Basic Materials hinges largely on the uncertainty around commodity prices and China’s economic performance. A significant uptick in China’s growth and subsequent demand for commodities will be important to monitor.
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