AFIC (ASX:AFI) aims to grow its dividends faster than inflation. Is it delivering?

How do AFIC’s dividends stack up?

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The Australian Foundation Investment Co Ltd (ASX: AFI) has been an ASX stalwart for decades. Since it first opened its financial doors in 1928, AFIC (as it’s more easily known) has built a reputation as a listed investment company (LIC) focused on strong, stable and robust returns. In an age before anyone had heard of an exchange-traded fund (ETF), this was a useful reputation to have.

And it’s one that AFIC has arguably upheld in this modern age. According to the company’s website, AFIC shares have returned an average of 13.2% per annum over the past 10 years (including the benefits of franking). That is a significant outperformance of the S&P/ASX 200 Accumulation Index, which has returned 11.6% per annum over the same period (also including franking).

Dividends: Has AFIC still got it?

One of the main attractions that investors have towards AFIC is the company’s history of dividend payments. AFIC has paid out a biannual dividend for decades now, and one that has tended to rise over time.

With talk of inflationary pressures returning to investors’ minds with a vengeance in 2021, dividends are arguably more important than they have been for years. This, AFIC is happy to tell us, is a primary concern for this company. Here’s what it has to say on its dividend policy:

As a long-term investor, our primary method of communicating value to our shareholders is through a growing stream of fully franked dividends. We aim to provide shareholders with real income growth through dividends growing at a greater rate than inflation.

So AFIC promises investors that it will ‘aim’ to ensure its dividends not only keep pace with inflation but outstrip it, compensating investors over and above for its wealth-destroying effects.

So how do AFIC’s dividends measure up in this regard?

Well, here is a table of AFIC’s dividend payments over the past decade or so, against the Australian inflation rate (sourced from rateinflation.com):

YearAFIC fully-franked dividend (cents per share)Rise over previous yearAnnual inflation rate
2011213.3%
2012211.8%
2013224.76%2.4%
2014222.5%
2015234.55%1.5%
2016244.35%1.3%
2017241.9%
2018241.9%
20193233.3%1.6%
202014(56.25%)0.8%
202114~2.63% over first 3 quarters
Table: Author’s own | Source: afic.com.au

A mixed bag when it comes to inflation

So as you can see, AFIC’s dividends have done a pretty decent job keeping ahead with inflation, with the obvious caveat that we haven’t seen this continuing over the past 2 years. The coronavirus pandemic has played havoc with both inflation and the share market. And while inflation seems to be stepping up more recently, AFIC’s dividend payments have yet to catch up. We can probably blame the dividend drought of 2020 for this.

As a LIC, AFIC holds an underlying portfolio of ASX shares, the most prominent of which are the blue chips like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). Westpac and CBA (like the other ASX banks) slashed their dividend payouts last year in response to the threat COVID posed to the Australian economy. In turn, this means AFIC would have received fewer dividends from its holdings, hampering its capacity to fund its payouts.

So it remains to be seen whether AFIC’s 2022 dividends and beyond can return to the levels they were at before 2020 and, in turn, continue to keep up with inflation. So circle 24 January 2022 on your calendar – that’s when AFIC will release its interim results for FY2022, and we’ll probably find out what its next dividend will be.

At AFIC’s current share price of $8.18, this ASX LIC has a trailing dividend yield of 2.93%.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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