Australia's largest corporations have distributed in excess of $53.7 billion to investors over the last 12 months with the rate of growth in total dividends paid now exceeding the rate of earnings growth, according to Perpetual Limited (ASX: PPT).
Blue-chip companies like Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA) are just a tiny handful of companies to have ramped up their dividend payouts over the course of the earnings period. Even Telstra Corporation Ltd (ASX: TLS) increased its dividend for the first time in eight years to 14.5c per share, up from 14c a share.
In recent years, this would have been viewed favourably amongst investors who sought out high-yielding dividend stocks to offset the poor returns on offer from bonds or term deposits. Although high-dividend yields are great for the bottom of your pockets, payments come directly from the companies' cash flow and cash on hand. This therefore restricts management's ability to invest in growth initiatives, pay down debt and increase earnings. Many investors have begun to realise the current amount of payouts could be hindering performance.
For instance, if a dividend distribution is likely to be unsustainable, it seems many investors would now prefer a lower dividend be paid and the remaining cash be put towards investments in future growth or improving the balance sheet. Even yesterday when Fortescue Metals Group Limited (ASX: FMG) announced a huge $1.7 billion profit and a 10c interim dividend (almost doubling the market's expectations), its shares fell 2.3% – perhaps investors would have preferred a portion of that money be put towards paying off its enormous debt?
Currently, the S&P/ASX 200 Index's (Index: ^AXJO) (ASX: XJO) payout ratio is hovering at around 64%, which is still well above the 60% 10-year average. According to Perpetual economist Matthew Sherwood, it is likely that the ratio has already peaked for the period at 64.5% and is now on the way back down, whereby dividend growth will now more closely reflect earnings growth.
The big four banks, namely Commonwealth Bank, Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB), have been amongst the biggest beneficiaries of investors' search for yield. However, growth in the dividends paid by these corporations could be limited in the medium-term given the new regulations that will require the banks to hold more capital in reserve.
Foolish takeaway
The nature of dividends is that they are only sustainable with higher earnings. Although they can provide your portfolio with a handsome income stream, investors should also focus on the strength of a company's balance sheet and growth prospects to ensure that payments can be sustained.
