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Ready to eat dividends?

Australian equities are likely to underperform the world market over the next five years, according to the Blackrock Investment Institute. Local market returns are expected to average 4.5% over these years, compared with 6% for US markets, and 9% for Europe.

Fig 1: Blackrock five-year return forecasts (Data as of 24/1/22)

While we have chosen to focus on Blackrock’s estimates (for those interested, their interactive website is excellent), the forecasts are similar to those of other major global fund managers and asset consultants. Put simply, it’s hard to be bullish when most believe we’re entering a global tightening cycle.

If these forecasts are accurate, the reality for many Australian investors is that dividends will make up nearly 100% of expected total returns from equities over this period. Capital growth would likely prove negligible, as the positive effects from earnings growth are largely offset by falling valuations (as rates rise, valuations typically fall).

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