Why ASX dividend shares might be a double-edged sword against inflation

Following a strong 12 months of business activity, shareholders of ASX-listed companies are now set to be treated to an aggregate $42 billion in dividend payouts in September.

This follows on from a similarly pricey $45 billion collective payout back in December 2021.

The moves signal a strong period of corporate earnings for Australian listed companies, with members of the S&P/ASX 200 Index (ASX: XJO) in particular boasting record dividend payout margins.

Announced share buybacks were also amongst the highest on record as companies seek to return capital to investors en masse this year.

What’s this mean for inflation?

There’s no doubt everyone’s heard of – or felt in their wallets – the latest pandemic, that is inflation, that continues to grip the economy.

The Reserve Bank of Australia (RBA) has taken measures to clamp surging prices by increasing its key policy interest rates for the first time in years.

With that, it hopes to rein in the level of discretionary spending, credit creation, and financial asset growth in Australian markets, thereby slowing price growth.

However, a $42 billion cash injection isn’t exactly conducive to its plans.

Thankfully, not all of the capital being returned to shareholders through dividends will arrive directly into their brokerage accounts.

Some will be directly reinvested back into buying additional shares or funding additional investments, either by design or investor choice.

Another chunk will go to fund the balance sheets of retirees who use annuity-style instruments like dividends as income-producing assets to match their annual liabilities.

However, the transfer of wealth from corporate to residential and institutional Australia comes at a time when spending is on the RBA’s and the government’s radar. Certainly, there’s a good chance a portion of the proverbial cheque will be spent in the real economy.

Exactly where and to what sectors the income will flow is anyone’s guess.

However, given that a good portion of the dividend-paying shares are also tied up ‘escrow’, in vehicles like superannuation funds for instance, the impact mightn’t be as severe as it appears.

Keep in mind, the two largest companies in the world by market value, Saudi Aramco and Apple, recently released their figures. Saudi Aramco posted second-quarter net profit of $48.4 billion while Apple paid a Q2 2022 quarterly dividend of $27 billion alone.

Closer to home, the overarching impact of Australia’s dividend payout figure remains to be seen. In any case, experts are predicting interest rates will continue to rise until inflation cools.

The post Why ASX dividend shares might be a double-edged sword against inflation appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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