What happened to the dividend & interest income?

According to Wikipedia the 2008 Global Financial Crisis (GFC) was considered by many economists to be the worst financial crisis since the Great Depression. The resulting panic and irrational investor behaviour saw many investors sustain significant losses when they switched out of plunging global equity markets (including the Australian Stock Exchange) and converted these investments into the “safe haven” of bank term deposits.

It is important to remember prior to the GFC the ASX All Ordinaries Index peaked in November 2007 at 6,873.20 and on 6th March 2009 (only 16 months later) bottomed out at 3,111.70. This is a drop of 54.7%! It isn’t hard to understand why this caused significant turmoil in investor’s lives.

But what actually happened to share values, dividend income and interest income between December 2007 and December 2014?

I have researched this over the last few days and the results are interesting. To do this I looked at the current top 20 holdings which are owned by blue chip listed investment company Australian Foundation Investment Company (ASX Code: AFI) and assumed I invested $30,000 in each Company (total investment = $600,000) on 31 December 2007. These ASX companies include the big four banks, BHP, Telstra, Wesfarmers, Woolworths, AMP etc – you can see this list by visiting the Australian Foundation Investment Company website.

I compared this with investing in a 12 month Term Deposit in December each year which pays monthly interest (source RBA statistics).

Portfolio Value Dividend Income pa Term Deposit Interest Income pa
31 Dec 2007

$600,000

$21,783

$600,000

$32,100

31 Dec 2008

$427,768

$23,873

$600,000

$35,400

31 Dec 2009

$521,173

$20,679

$600,000

$22,500

31 Dec 2010

$514,131

$21,861

$600,000

$36,000

31 Dec 2011

$467,462

$23,224

$600,000

$36,900

31 Dec 2012

$551,608

$23,418

$600,000

$30,000

31 Dec 2013

$648,254

$24,921

$600,000

$24,900

31 Dec 2014

$690,556

$26,610 **

$600,000

$20,400

The value of the Portfolio on 6 March 2009 would have been $361,460 – a staggering drop of 39.76%.

**Please note this does not take into account the value of imputation credits or taxation. However, if you assumed the portfolio was 80% franked this would generate refundable imputation credits of $9,123 in the 2014 year.

Analysis of the Results

  • It took 6 years for the share portfolio to be worth at least its initial $600,000 investment, however there was only 1 year (2009) where the dividend income did not exceed its 2007 income (which was pre GFC);
  • Even though the portfolio dropped in value by 39.76% compared to its initial investment, the dividend income in 2009 dropped by only 5.07% compared to its 2007 income.
  • The dividend income increased each year since the 2009 year;

What are the most important points to take from this?

The most important thing investors need to understand is the concept of RISK.

Investing in the sharemarket brings with it Volatility Risk as the value of your investment can fluctuate (sometimes wildly!) For some investors, this is unbearable.

Investing in Term Deposits, which are effectively capital guaranteed, brings with it Inflationary Riskand Interest Rate Risk. You can see from the above table the Term Deposit investor still only has $600,000 after 7 years, which would not purchase the same amount of goods today as December 2007. You can also see the income generated from this deposit has nearly halved since 2007 and will only be $19,200 in the 2015 year.

This article is certainly not a recommendation to invest in the sharemarket! It is merely trying to bring to your attention the capital and income behaviour of shares and bank deposits. I tell all of my clients that wherever they invest, it must first pass the “sleep at night test”! If you are investing in an area that stresses you out and keeps you from sleeping – then you should not be investing there. Simple as that! For some people this may result in 100% of their investments being in a Term Deposit – and that is completely fine!

Just make sure you understand the difference between these types of investments.

Please contact your accountant at Green Taylor Partners to discuss this further and we can point you in the right direction as to where you can get appropriate investment advice in these areas.