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Concentration risk amid rising dividends

Global dividends concentration risk Janus Henderson

Dividend payments reached a new high in the second quarter of this year, but highlighted the concentrated nature of the Australian share market.

Global dividends reached a new record in the second quarter of this year, driving dividends in the Australian market upwards by 23 per cent, and while banks will remain large contributors, investors have been warned about the limited sources of returns available to them locally.

The Janus Henderson Global Dividend Index reported a 4.9 per cent increase in the level of global dividends to $844.7 billion in the second quarter, driven in part by European companies, which make a single annual payment during that period.

The index added that the strong uptick also boosted dividends in the Australian market, which increased from $10.09 billion in the same quarter in 2022 to $13.1 billion in 2023 on the back of strong contributions from Westpac and Woodside Energy.

It also flagged that bank stocks contributed half of global dividend growth during the second quarter as rising interest rates increased margins and COVID-19 pandemic-related disruptions to dividend payments came to an end.

At the same time, vehicle manufacturers accounted for one-seventh of the year-on-year increase in payouts, but conversely mining stocks made the largest negative contribution due to lower commodity prices.

Janus Henderson head of global equity income Ben Lofthouse acknowledged while economic growth would flatten due to higher interest rates, dividend growth was expected to continue.

“Most regions and sectors are delivering dividends in line with our expectations. The banking sector in particular will continue to deliver solid growth for the rest of the year, making record payments to shareholders,” Lofthouse said.

“A weaker economic environment is typically negative for banks, but the positive effect on bank margins from the end of years of ultra-low interest rates is very powerful and is driving dividend payouts. The big banks are very tightly regulated and so enter the downturn in a strong capital position.”

Janus Henderson head of Australia Matt Gaden added the index served as a reminder to local investors that the Australian market was limited in many areas and they should consider looking beyond certain sectors and to overseas markets.

“Amidst the impressive surge in Australian dividends this past quarter, it’s essential for investors to remain mindful of the concentrated risks within our local mining and banking sectors,” Gaden said.

“Diversification, not only across different industries but also across different countries, can act as a shield against the ups and downs of economic cycles, such as the volatility in commodity prices, which are all too familiar for Australian investors.

“Given the slightly tempered economic growth outlook, Australians seeking to complement their domestic holdings with those based offshore may well enhance their ability to navigate uncertainties more effectively.”

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