News & Insights

A prudent approach to dividends can meet the needs of banks and retirees

Plato Investment Management (Plato), a leading Australian investment management firm which specialises in retirement income solutions, is urging the big 4 banks to take heed of the Australian Prudential Regulation Authority’s (APRA) suggestion to utilise underwritten dividend re-investment plans (DRPs) in order to continue paying dividends.

Plato’s Managing Director, Dr Don Hamson, says underwritten DRPs is a solution that can help address concerns about the ability of lenders to maintain capacity while paying dividends.

“We know many of Australia’s traditional income stocks have dividend re-investment plans (DRPs).

These companies can choose to underwrite those plans, which effectively means that new shares will be issued matching the dollar value of all the dividends that they pay,” said Dr Hamson.

“For all those investors electing cash rather than the DRP, the company will still issue new shares which a broker will sell on market during the DRP pricing period. This allows the company to completely preserve its capital as well as paying dividends to those who rely on the income to make ends meet.”

Dr Hamson says APRA has acted prudently in its recommendations thus far regarding bank dividends and it should encourage the big 4 banks to take up this option to ensure Australian retirees and other investors who rely on dividend income from the big 4 banks aren’t hung out to dry.

“Destroying the major income stream of thousands of Australians, many of whom are retirees, will put further strain on the economy, which we believe will fall into a deep recession in the June quarter of 2020,” said Dr Hamson.

Plato estimates that the big 4 banks paid 30% of gross dividends (cash dividends plus franking) of the entire S&P200 index in 2019.