Brad Matthews

Retirees and their advisers may need to plan alternative cash flow streams in the post-pandemic era as banks hit the pause button on dividends and traditional income planning strategies go awry.

Last week NAB cut its dividend by 64 per cent, while ANZ and Westpac deferred theirs after mortgage pullbacks, record low rates and huge remediation bills contributed to 51 per cent and 64 per cent (respective) profit slumps.

For retirees used to chasing dividends it’s a painful reminder that these are ultimately discretionary. Lingering uncertainty around the viability of franking credits only serves to reinforce sentiment that when it comes to retirement income, there are no sacred cows any more.

According to BMIS founder Brad Matthews, stopping clients from “fixating” on income-producing shares over those that focus on capital growth is the first step in reshaping the investor mindset.

“There’s certainly a need to re-educate clients who view income over capital growth as having more value,” Matthews says. “Rationally, you should be ambivalent as to whether you get income or growth in a tax-free retirement environment; from a wealth creation perspective it doesn’t make a difference,” he says.

Australian investors have historically shared a somewhat myopic love for blue-chip companies that pay generous dividends gilded by imputation credits. Advisers have done their best to spread the diversification message, but many still put income on a pedestal.

“I’ve had a number of prospective new clients in the last three weeks contact me because their strategy has been to hold term deposits and the banks,’ says adviser Richard Jackson. “That strategy is still pretty common.”

Getting clients to shake their income bias, Jackson believes, should go hand in hand with getting them to embrace a “total return” focus that embraces both sides of the income/growth coin.

“CSL is the classic example in Australia,” he explains, referring to the Australian biotech known for funnelling returns back into the company instead of paying large dividends. “It’s a low-dividend share that’s delivered great capital growth over the years.”

As Jackson explains, however, the tough part is selling people on the idea that divesting assets for cashflow is just as valid as chasing dividends.

“Harvesting growth is a legitimate way to generate income, and it doesn’t mean your sacrificing the sacred cow,” he says.

The annuity aversion

While annuities provide the most obvious alternative to dividend-based income streams they have always faced an uphill battle in Australia, which is probably due to cultural and market factors in equal measure.

Retirees haven’t embraced annuities here like they have in the US and the UK, so the market is thin. APRA reported the proportion of total pension member benefits paid out as annuities in Australia was 3 per cent in 2019, while account based and allocated pensions combined for around 83 per cent of benefits paid.