Everybody loves a milestone. Whether it be a birthday, a tonne in cricket (try 335 not out), or a footy player clocking up x-hundred games.
Partygoers, fans and other assorted hangers on stand to their feet and applaud the occasion. Good on you, they sing in chorus.
As it turns out, the markets are quite similar. It too likes to recognise milestones. Each time the Dow Jones notches up another 1,000-point milestone, investors (those who are long, that is) stand on their desks and cheer.
With the Dow ratcheting up record after record — and milestone after milestone — Australian investors have felt a little bit left out.
Not only have they had nothing to cheer about, it’s like they weren’t even invited to the party at all.
Over the last 10 years, the Dow has doubled its pre-GFC high. Set your measuring tape at the post-GFC low, however, and you will see that the Dow has quadrupled.
Even Japan, the country most famous for its two-decade post-property bubble hangover, has seen its primary index more than treble over the same time.
For poor old investors in Australia, index watching has been anything but fun.
Only in July did the ASX 200 finally pip, and then only just, its pre-GFC high. It was a milestone almost 12 years in the making. But the celebrations were subdued…more of an ‘about bleedin’ time’, than exultant jubilation.
So too it was with the Australian market again reaching an all-time high this past week. I guess Australian investors have long given up on the ASX 200 index bounding ahead in front of the pack.
The problem with comparing the ASX 200 index with all the others, however, is that it ignores something fundamental to the Australian market…dividends.
Australia is a ‘yield’ market
It’s a well-worn phrase that Australia is a ‘yield’ market, whilst the US is a ‘growth’ market. Mind you, there are thousands of American companies that pay regular dividends.
However, dividends and income are not the primary reason US shareholders invest. Investors there are much more likely to be on the hunt for the next Apple, Amazon, Alphabet (owner of Google) or Facebook.
If you can get onto just one of these stocks early — and hopefully a couple — in your lifetime, you could be in for some seriously game changing wealth.
Think of how much you might typically invest in a stock here, and then do the maths.
In July, Amazon just fell short of its all-time high (from September last year) of US$2,050 per share. That’s a massive move for a stock you could buy for as low as $35 just over a decade ago.
You would have invested $10,000, you say? Well, at $2,050 a share, that holding is worth around $585,000.
Around the same time (2008) you could have bought shares in Apple for US$12. Today, they are closing in on $270. Your 10 grand would now be approaching over $140,000.
Compare those moves to some of our biggest stocks, like the long, lumbering banks.
Normally you’d only expect moves like this from speculative and/or small-cap stocks. However, the combined market cap of just Apple and Amazon combined now exceeds a mind-boggling US$2 trillion.
And the yield on Amazon or Apple?
Well, with Apple, you are looking at a current yield of 1.15%. And Amazon, well it’s even less. In fact, it is zero! Amazon doesn’t pay a dividend at all.
For a $900 billion company with annual revenues of around $250 billion — that’s around six times the size of BHP Group Ltd’s [ASX:BHP] annual US$44 billion revenue — Amazon investors clearly aren’t in the stock for yield.
If Apple and Google decided to share a big chunk of annual profits through dividends — and do so regularly — it is unlikely their share prices would be anywhere near as high as they are now. Both companies keep reinvesting income for future growth.
Compare that to the sector that makes up the largest slice of the Australian index, financial services (at 40%). The largest of them, the big four banks, have at times paid out well over 90% of their profits in dividends.
Multiply that out by decades of dividends, and it easily exceeds $100 billion collectively, just for the big four.
If Amazon was an Australian company listed on the ASX, it is impossible to believe that the huge fund managers would allow them to continue without paying a dividend. They would keep needling away at the CEO and board until they parted with some, or all, of their cash.
Therein lies the difference between US and Australian fund managers. A difference that is as much about the constituents of the different markets and indices, as it is about investment style.
In other words, fund managers have different expectations out of their respective markets.
That is why looking at the ASX 200 index in isolation is not the most accurate way to look at the performance of the Australian market.
Instead, the accumulation index, which includes the re-investment of dividends, is a far more accurate indicator of how the Australian market is really performing.
Right now, the all ordinaries accumulation index (AXJOA) is up 74% since its pre-GFC high. Even more tellingly, the AXJOA has more than trebled from the post-GFC low in 2008. In fact, it is now approaching a level three-and-a-half times bigger.
Surprisingly, this performance hasn’t enjoyed much in the way of celebrations, or fanfare.
But by looking at the accumulation index — and not just the ASX 200 index — the performance of the Australian market is not as bad as it first seems.
Indeed, in its own way, it has matched the performance of the much higher profile US markets, but with none of the fuss…nor milestone headlines.
And what is the driver of this performance? That’s right…dividends.
If you invest in the Australian market solely for capital gains, then unless you are great at picking emerging small- and mid-caps, you might just be investing in the wrong market.
The more you understand and appreciate the true role of dividends (and income), the more you will understand the Australian market.
All the best,