Columns P & Q – Dividend Yield
Cameron : Column P is the dividend yield. Again, this is straight-up financial data you can find on most data services.
Tony : Yeah. Sometimes there are two numbers. They give you what they call the “dividend yield percentage” and then the “gross dividend yield percentage”. The gross is simply taking into account that when you get paid a dividend in Australia, you get a franking credit as well. So it’s basically adding 30% to the dividend. But we’re just looking at the basic dividend or dividend yield number.
Cameron : Right? Why don’t we want to use the gross one?
Tony : Well, we can, but I think we just have to change the metrics that we use. That’s all, the cutoffs,
Cameron : Why?
Tony : Well, we’re going to ask if the dividend yield is greater than the mortgage rate. Sometimes you might want to borrow against the equity in your home and use those funds to buy stocks, something I have done from time to time. It’s an advantage to be able to buy stocks and have the dividends pay off the interest if you want to gear against stocks, so that’s the basic test. If used the gross dividend yield, the problem is that you’d have to wait to get your tax return back, so you can use your franking credits to service that debt, which would probably give us cash flow problems.
Cameron : Okay. It’s good for people that are leveraging their portfolio, like I know you have done in the past, but I just want to be clear about this because we’ve had some people who get confused about this. They make the assumption that you care about dividend income but you’re not buying stocks for the dividend. You just see this as one particular indicator of potential growth for the stock
Tony : Yes, and I think the other important point is that the boards of companies will have to be very certain that they can maintain a dividend once they start paying it, because companies share prices are marked down very heavily if they have to withdraw a dividend or reduce it. So basically it’s a sign of stability in the earnings of a company.
Cameron : Yeah. Good point. Okay. So moving right along column Q is the question is the dividend yield higher than the mortgage rate? This is how where we score them for their dividend yield. Where do we determine what the mortgage rate is? We just go to a bank site and check?
Tony : Yeah, that’s what we’ve been doing. There are websites out there (eg Canstar), which provide a comparison of mortgage rates across the major banks. They will often have very cheap mortgages in there, which I tend not to use, because I don’t think people can necessarily always borrow at those rates, depending on their circumstances. I tend to go to the big banks and check their benchmark.