CountriesBeginner· 6 min read

Investing in Australia

The one thing to remember

Australia's dividend culture is not a preference, it is a rational response to a tax rule.

The question

Understand why Australian companies pay out so much, and what the index really holds.

Figure

The same argument as the text, as a chain. Each step is what makes the next one possible.

Figure

Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.

1
The index is miners and banks
Iron ore and a tight banking oligopoly do most of the work. As with Canada, a broad-sounding index is in practice a concentrated one, and its fortunes are tied to Chinese construction demand.
2
Franking credits change the arithmetic
Australian dividends can carry a credit for tax the company has already paid, so a domestic investor is not taxed twice on the same profit. This makes dividends genuinely more valuable to Australians than to foreigners.
A foreign investor generally cannot use franking credits, so the headline yield overstates what you actually receive.
3
Which is why payout ratios are so high
Companies respond to the incentive by distributing heavily rather than reinvesting. That is rational, and it also means less capital is retained to compound inside the business.

Try it

Reinvest the dividend, or take the cash?Interactive

Reinvested Taken as cash

Dividend yield4%

Share price growth4%

Years30

Reinvested

£100,627

Spent

£54,868

Difference

83%

Same company, same dividend. The only difference is whether the cash buys more shares. Over decades that choice is most of the outcome.

You have got it when

You can explain why an Australian dividend is worth more to a local than to you.

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