Do BHP Billiton and Rio Tinto dividend cuts mean the glory days are over? – by Michael Smith (Australian Financial Review – March 16, 2016)

Dividends have long been the Holy Grail for Australian investors. The insatiable appetite for yield has driven investment strategies for decades to the point where the Reserve Bank of Australia has criticised companies for putting shareholder returns before investing in their own future growth plans.

Everyone loves dividends, and for good reason. In the current environment of low interest rates and stagnant earnings growth they are one of the only ways to reap returns of 4 per cent or more.

Fully franked dividends also keep the tax man at bay; under the Australian taxation system you don’t have to pay tax on dividends already paid by the company.

Zero tax payers, such as self-managed super funds in pension mode, love franking, because the dividends are “grossed up”, which means a yield of 5 per cent becomes 7 per cent-plus once the rebate is received from the Australian Tax Office.

But the glory days may be over as the big banks put the brakes on further increases in dividends after a decade of growth, while miners such as BHP Billiton and Rio Tinto withdraw their progressive dividend policies.

Equity strategists say earnings per share growth for Australian companies will outstrip dividend growth for the first time in five years.

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