One of the consequences of the current low-interest rate environment has been the increased demand by investors – particularly self-funded retirees such and those with self-managed super funds (SMSF) – to invest in stocks paying high and maintainable dividend yields.
From an investor's point of view, identifying historically high yielding stocks is relatively straightforward however determining whether the dividend is maintainable or growing is much more difficult given it requires an accurate assessment of the future.
Given the reliance of many retirees on dividend income to cover living expenses, two recent developments are perhaps worthy of attention…
1. The probability of dividend cuts is rising
According to a report on the ABC website, a research note by investment bank Morgan Stanley has suggested that the pay-out ratios of Australian bank stocks – a favoured sector amongst Australian investors – are at their upper limit as a result of higher capital requirements.
While this doesn't necessarily mean bank dividends will be cut, it does increase the prospect that dividend growth may be subdued in the near term.
Investors should perhaps reassess their expectations for future dividend growth rates within the bank sector with Morgan Stanley singling out Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) as having less room to move given their already high payout ratios.
2. Tax reform may also include superannuation tax changes
The ABC has also run a story reporting on the Federal Treasurer's comments that superannuation tax changes might be part of the Government's wider tax reform plans.
Purportedly this could include taxing higher income earners at higher rates on their super contributions. While SMSF investors already in the retirement stage are unlikely to be affected should any tax changes occur, for workers who have carefully laid out savings plans to reach their retirement goals, a possible shift in the "goal posts" will no doubt be alarming.
While the government's plans should become clearer next year, one sector that could benefit is the salary packaging sector. Firms such as McMillan Shakespeare Limited (ASX: MMS) could stand to benefit as workers seek out other ways to maximise their after-tax income.
