A Case for Dividend Investing

A Case for Dividend Investing Many investors may be surprised to learn that dividends paid by companies have accounted for 45% of the total return for Australian equities over the last 10 years 1. Buying companies that pay strong, sustainable, tax effective dividends has been a long term strategy which has benefited investors across market cycles. DIVIDENDS A CRITICAL COMPONENT OF EQUITY TOTAL RETURN Dividends have historically been a critical component of the overall return from an investment in Australian equities. On a cumulative basis, dividend income has contributed more than one third of total return for Australian equities since 1980, with capital appreciation accounting for the rest (See Figure 1). During the last decade this proportion has increased with dividends contributing around 45% of the total Australian equity return over the 10 years to December 2009. Quite clearly dividends matter to total returns. FIGURE 1: AUSTRALIAN ALL ORDINARIES INDEX GROWTH/ INCOME RETURNS DECEMBER 1979 TO DECEMBER 2011 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 12.68% 4.99% Growth 6.22% 4.40% 4.62% 4.22% 3.90% Income Dec 1979 - Dec 1989 Dec 1989 - Dec 1999 Dec 1999 - Dec 2009 Dec 2009 - Dec 2011 Dec 1979 - Dec 2011 Source: SSgA and Factset UPSIDE POTENTIAL WITH REGULAR CASH FLOWS Capital appreciation and dividend income together make up the total return from an investment in shares. Historically dividend income has proven to be a far more stable component of the total returns than capital appreciation. In markets where capital appreciation is absent or negative, dividends can provide a steady source of returns. -8.24% 6.70% 4.49% During turbulent times, strong dividend yields can act as a buffer to cushion overall returns. For example, during 2002 and 2008, the MSCI Australia Investable Market Index (the market index ) 2 fell by 9.1% and 38.8% respectively. During the same period, the MSCI Australia Select High Dividend Yield index returned 3.5% and 2.1% respectively(see Figure 2). Moreover the MSCI Australia Select High Dividend Yield Index also participated in market upswings, slightly outperforming the broader market index over the last ten years. A dividend focused strategy may make sense for investors looking for regular income while also wanting to participate in capital appreciation. FIGURE 2: BACK-TESTED ANNUALISED PERFORMANCE OF MSCI AUSTRALIA SELECT HIGH DIVIDEND YIELD INDEX VS ANNUALISED PERFORMANCE OF MSCI AUSTRALIA INVESTABLE MARKET INDEX, MAY 2000 MAY 2012. 2 (%) 60.0 50.0 40.0 30.0 20.0 10.0 0.0-10.0-20.0-30.0-40.0-50.0 18.8 5.5 May 00 - Dec 00 21.1 9.2 MSCI Aust Select High Div Yield MSCI Aust IMI -5.9-9.1 13.8 14.4 27.8 27.4 16.9 25.2 20.3 24.2 5.8 16.4-36.7-38.8 48.8 39.3-3.9 1.9-5.5-11.7 4.8 2.3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec 11 - May 12 Source: FactSet, MSCI and SSgA, as at 31 May 2012 INVEST IN DIVIDEND-FOCUSED ETFS SPDR MSCI Australia Select High Dividend Yield Fund (ticker: SYI) LEARN MORE AT SPDRS.COM.AU 1

COMPOUNDING EFFECT To illustrate the effects of dividends on equity returns, the history of price and dividend reinvested total returns of the market index from May 1994 to May 2012 is illustrated in Figure 3. Excluding dividends, a $100,000 investment in the market index on 31 May 1994 would have grown to $212,658 by the end of May 2012. The same amount of investment with dividends reinvested would have amounted to $434,328 during the same period, more than doubling the investment return without dividend reinvestment. FIGURE 3: MSCI AUSTRALIA INVESTABLE MARKET INDEX CUMULATIVE RETURN OF $100,000 FROM MAY 1994 - MAY 2012 A$ 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 May-94 May-95 May-96 May-97 Price Only May-98 May-99 Source: SSgA, Factset, MSCI May-00 Total Return with Dividends Reinvested May-01 May-02 DIVIDEND AND FRANKING CREDITS Australian companies can also attach franking credits to dividends that are paid out of profits on which Australian tax has been paid. Australian resident tax payers can use these credits to offset their tax liabilities or to get a cash refund depending on their tax circumstances. Sustainable and persistent dividends are usually paid by mature and stable companies with a good track record of dividend payments. They also tend to be paid from profits that have already been taxed, and so usually come with franking credits attached. A dividend focused strategy that boosts income by 1% pa may increase income by as much as 1.4% pa after including the benefits of franking credits. May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 DEMOGRAPHIC CHANGE AND DIVIDEND INCOME Like many other developed countries, Australia is faced with an aging population. Treasury has projected a doubling of the population aged 65 to 84 years and quadrupling of population aged 85 and over by 2050. 4 The government s three pillars toward retirement funding are voluntary saving, compulsory superannuation guarantee contributions and the government sponsored age pension. 5 Although the cornerstone of the Australian retirement system, the age pension system can only provide a modest retirement support for those people who cannot fully support themselves. Increasingly, more retirement funding will be via savings inside or outside the superannuation system, creating an increasing pool of assets to be drawn upon by retirees. Developing investment strategies to support retirees presents particular challenges. There is usually a requirement for income to support ongoing living expenses, but there is also often some reluctance to remove all prospects for growth by investing only in fixed income securities and cash. We believe that dividend focused strategies have attractive attributes for investors seeking to build a post retirement portfolio. INCOME: EQUITIES, BONDS OR CASH? For investors focused on income generation, there are a number of asset classes or strategies available. Equity strategies deliver dividends, fixed income strategies deliver interest coupon payments while cash strategies deliver daily or monthly interest payments. Figure 4 shows the yearly incomes of a number of investment strategies over the last 12 years. The incomes are calculated based on historical returns of $100,000 invested at the end of May 2000, assuming no dividend reinvestment. Perhaps surprisingly, the dividend income from the MSCI Australian Select High Dividend Yield Index has not only exceeded the broader market over this period, it has also exceeded both 90-Day Bank Bills and 10-Year Australian Government Bonds. When franking credits are taken into account, the total return from the MSCI Australia Select High Dividend Yield Index is significantly higher than returns from the broader market index, cash and bond strategies. 6 With yields on cash and fixed income, on average, at the lower end of their 10 year history, dividend income could play a significant role for investors building a portfolio for sustainable income. Specifically designed to target high dividend paying stocks, the MSCI Australia Select High Dividend Yield Index provided additional yield of 1.7% pa more than the broader market such as the market index as at 31 May 2012. Taking franking credits into account the additional yield pick up was almost 2.5%pa at that point in time. 3 2

FIGURE 4: INCOME FROM $100,000 INVESTMENT FROM MAY 2000 TO MAY 2012, BEFORE FEES AND TAXES. BUY-AND-HOLD, NO RE-INVESTMENT, GROSSED UP FOR 80% FRANKING 7 16,000 14,000 MSCI Aust Select HDY - Dividend (LHS) MSCI Aust IMI - Dividend (LHS) 90 Day Bank Bills - Interest (LHS) 10 Year Govt Bonds - Coupons (LHS) MSCI Aust Select HDY - Principal (RHS) 90 Day Bank Bills/Bonds - Principal (RHS) MSCI Aust IMI - Principal (RHS) 250,000 12,000 200,000 Income (A$) 10,000 8,000 6,000 150,000 100,000 Investment Principal (A$) 4,000 50,000 2,000 - May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 - For illustration purposes only. All currency is in Australia Dollars. Source: SSgA, Factset, MSCI and RBA RETIREMENT PLANNING AND MARKET VOLATILITY One criticism of equity investing for retirees is the risk of short term capital loss from which the investor is unable to recover. Younger investors, with many years remaining until retirement and with cash flowing into superannuation accounts, are often better able to ride out the ups and downs of the equity market. It is true that asset class diversification in a post-retirement portfolio is desirable for risk management purposes. However the case against equities can be overstated. New retirees typically face many, many years during which they require productive investments. How then, should retirees approach equity market volatility? In our view equity market volatility is less of a problem if retirees have at least some flexibility around the income they require in any given year. A retiree who has fixed, non-negotiable cash flow requirements can be more vulnerable to short term equity market movements. For this retiree, a sharp drop in equity markets may increase the rate at which capital is used to fund non-negotiable cash flow requirements. A retiree with some flexibility to reduce cash draw downs while equity market values and/or income levels are depressed should be much better equipped to ride the ups and downs of the equity market. Dividend focused strategies can allow retirees to more readily budget their cash flow requirements with a view to limiting the extent to which capital is depleted in a market downturn. ACTIVE OR PASSIVE, LISTED OR UNLISTED There are merits in both active and passive investment styles that have often been debated in financial literature. Passive investing generally has the benefits of low cost, diversification and transparency. The MSCI Australia Select High Dividend Yield Index provides a suitable benchmark for investors seeking to build a diversified portfolio focused on dividend yield. The index targets companies paying above average dividend yields that also meet sustainability and persistency screens established by MSCI. Further information is available at http://www.mscibarra.com/ products/ indices/custom/methodology.html Globally, Exchange Traded Funds (ETFs) have become increasingly popular among both institutional and retail investors as a means of gaining passive exposure to a market segment or index. An ETF contains a basket of shares that tracks a specific index, providing instant diversification compared to a single share. ETFs can be bought and sold on listed stock exchanges through brokers just like normal shares, giving investors full control and flexibility over their investment. Benefits of investing in a passive ETF include trading flexibility, diversification, low management costs and transparency. Given they are passively managed, ETFs tend to have lower turnover than actively managed funds, which can reduce overall transaction costs. Another major advantage of an ETF strategy is its transparency. Transparency levels are high; investors have access to the underlying index methodology, and the full list of stocks held by the ETF on a daily basis with performance and regular reporting also required by the Australian Securities Exchange. The SPDR MSCI Australia Select High Dividend Yield Fund (SYI) tracks the MSCI Australia Select High Dividend Yield Index and has been launched with a particular view to investors seeking above average dividends from their equity investments. Investors should consult the Product Disclosure Statement before investing. CONCLUSION Historically, dividends have been a substantial component of the total return available on Australian shares. Dividend orientated strategies, such as the SPDR MSCI Australia Select High Dividend Yield Fund, seek to provide regular and stable income, while also participating in long term capital appreciation. In the Australian context, dividends can also provide value for eligible investors through franking credits. In current market environment of relatively lower interest rates, dividend focused strategies such as the MSCI Australia Select High Dividend Yield Index have delivered income levels that exceed bonds and cash. 3

APPENDIX A: RETURN OF $100,000 INVESTMENT OVER A 10 YEAR PERIOD MAY 2000 MAY 2012 MSCI AUSTRALIA HIGH DIVIDEND YIELD INDEX MSCI AUSTRALIA INVESTABLE MARKET INDEX 90-DAY BANK BILLS 10-YEAR AUSTRALIAN GOVERNMENT BONDS STRATEGY Dividend Focused Equities Cash Fixed Income RISK High High Low Medium / Low AUSTRALIAN FRANKING CREDITS Y Y N N NO RE-INVESTMENT OF INCOME EXCLUDING FRANKING CREDITS TOTAL INCOME RECEIVED 95,388 68,528 63,038 75,617 TOTAL CAPITAL GROWTH 38,855 31,992 N/A N/A INVESTMENT 134,243 100,520 63,038 75,617 INCLUDING FRANKING CREDITS (ASSUME 80% FRANKED) TOTAL INCOME RECEIVED 128,092 92,023 63,038 75,617 TOTAL CAPITAL GROWTH 38,855 31,992 N/A N/A INVESTMENT 166,948 124,015 63,038 75,617 INVESTMENT 138,855 131,992 100,000 100,000 WITH RE-INVESTMENT OF INCOME EXCLUDING FRANKING CREDITS INVESTMENT 161,849 117,452 79,800 110,530 INVESTMENT 261,849 217,452 179,800 210,530 INCLUDING FRANKING CREDITS (ASSUME 80% FRANKED, FRANKING CREDITS ALSO RE-INVESTED) INVESTMENT 225,096 157,880 79,800 110,530 INVESTMENT 325,096 257,880 179,800 210,530 Source: SSgA Research, MSCI and RBA. Income and returns from MSCI Australia Select High Dividend Yield Index are calculated based on back-tested index history. ABOUT SPDR ETFS Offered by State Street Global Advisors, SPDR ETFs are a family of ETFs that provide investors with the flexibility to select investments that are precisely aligned to their investment strategy. Recognised as an industry pioneer, State Street Global Advisors created the first ever ETF in 1993 the SPDR S&P 500, which is currently the world s largest ETF. 8 In 2001, SSgA introduced ETFs in Australia when it launched the SPDR S&P/ASX 200 Fund and the SPDR S&P/ASX 50 Fund. Currently, State Street Global Advisors manages approximately US$300 billion of ETF assets worldwide. 9 For more information about our ETFs or how to invest, please call +612 9240 7600 or email info@spdrs.com.au. 4

STATE STREET GLOBAL ADVISORS, AUSTRALIA, LIMITED Level 17, 420 George Street Sydney, NSW 2000 +612 9240 7600 www.spdrs.com.au 1 SSgA Research 2 The base date for MSCI Australia Select High Dividend Yield Index is May 2010. The MSCI Australia Select High Dividend Yield index history includes back tested history provided by MSCI. The back tested historical performance shown is not actual past performance of the index nor is it indicative of actual future performance, which could differ substantially. The information contained herein is provided in good faith and for general information and discussion only. The whole or any part of this simulation may not be reproduced, copied, transmitted or any of its contents disclosed to third parties without SSgA s expressed written consent. Index methodology is available at http://www.mscibarra.com/products/indices/custom/methodology.html 3 SSgA Research, MSCI and Factset. The comparison is based on indicative dividend yields and indicative grossed dividend yields as at 31 May 2012. Historical performance is not an indication of future performance. Actual future performance can substantially different from past performance. 4 The Australian Government Treasury, Australia to 2050: Future Challenges, Jan 2010 5 The Australian Government Treasury, Australia s Future Tax System The Retirement Income System: Report on Strategic Issues, May 2009 6 Refer Appendix A for a detailed comparison of return from the MSCI Australia Select High Dividend Yield Index versus returns from a broader Equity Index, 90-Day Bank Bills and 10-Year Government Bonds. Historical performance is not an indication of future performance. Actual future performance can substantially different from past performance. The base date for MSCI Australia Select High Dividend Yield Index is May 2010. The MSCI Australia Select High Dividend Yield index history includes back tested history provided by MSCI. The back tested historical performance shown is not actual past performance of the index nor is it indicative of actual future performance, which could differ substantially. Index methodology is available at http://www.mscibarra.com/products/indices/custom/ methodology.html 7 The results were based on SSgA calculation assuming $100,000 was invested at the end of May 2000. Income from Bank Bills was assumed to be paid based on prior period rates. For example, the interest received in May 2010 was based on Bank Bill rates as at end of April 2010. Income from 10-year Government bonds was assumed to be paid semi-annually and based on the 10-year government bond yield at the end of prior period. For example, the income from 10-year bond between May 2001 and May 2010 was based on yield as at 31 May 2000. Franking % is for illustration only, not the actual Franking %. Investing involves risk including the risk of loss of principal. Historical performance is not an indication of future performance. Actual future performance can substantially different from past performance. 8 Bloomberg, as of 30 June, 2012. 9 As of 30 June 2012. This AUM includes the assets of the SPDR Gold Trust (approx. US$66 billion as of 30 June 2012), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors serves as the marketing agent. FOR PUBLIC USE. All currency is in Australian dollars. This material has been issued by State Street Global Advisors, Australia Services Limited ( SSgA, ASL)(ABN 16 108 671 441) (Australian financial services licence number AFSL 274900), the Responsible Entity for SPDR ETFs, in conjunction with State Street Global Advisors, Australia, Limited ( SSgA ) (ABN 42 003 914 225) (AFSL Number 238276) the Investment Manager of SPDR ETFs. The issuer of units in SPDR MSCI Australia Select High Dividend Yield Fund (ARSN 145 353 591) is SSgA, ASL. A Product Disclosure Statement ( PDS ) for units in the Fund is available at www.spdrs.com.au. Investors should consider the PDS in deciding whether to acquire, or continue to hold, units in an ETF. An investment in a Fund does not represent a deposit with or a liability of any company in the State Street Corporation group of companies including State Street Bank and Trust Company (ABN 70 062 819 630) (AFSL 239679) and is subject to investment risk including possible delays in repayment and loss of income and principal invested. No company in the State Street Corporation group of companies, including SSgA, State Street Bank and Trust Company, SSgA, ASL and State Street Australia Ltd (ABN 21 002 965 200) guarantees the performance of the Fund or the repayment of capital or any particular rate of return, or makes any representation with respect to income or other taxation consequences of any investment in a Fund. Exchange Traded Funds ( ETFs ) trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF s net asset value. Brokerage commissions and ETF expenses will reduce returns. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against loss. SPDR is a trademark of Standard & Poor s Financial Services LLC ( S&P ) and has been licensed for use by State Street Corporation. STANDARD & POOR S, S&P, SPDR, S&P 500 have been registered in many countries as trademarks of Standard & Poor s Financial Services LLC and have been licensed for use by State Street Corporation. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. Further limitations and important information that could affect investors rights are described in the PDS for the applicable product. Standard & Poor s S&P Indices are trademarks of Standard & Poor s Financial Services LLC. S&P and ASX, as used in the terms S&P/ASX 50 and S&P/ASX 200, are trademarks of the Australian Securities Exchange ( ASX ) and Standard & Poor s Financial Services LLC ( S&P ) respectively, and has been licensed for use by State Street Global Advisors Australia Limited. SPDR products are not sponsored, endorsed, sold or promoted by S&P or ASX, and neither S&P nor ASX make any representation regarding the advisability of investing in SPDR products. The Fund is not sponsored, endorsed, sold or promoted by S&P Financial Services LLC, MSCI or ASX, and neither MSCI nor ASX assume any liability in connection with the administration, marketing or trading of the funds. MSCI and ASX make no representation regarding the advisability of investing in the Fund. MSCI Indices are trademarks of MSCI, Inc. MSCI Australia Select High Dividend Yield Index is a trademark of MSCI, Inc. ( MSCI ) and has been licensed for use for certain purposes by SSgA. SPDR MSCI Australia Select High Dividend Yield Fund is based on a custom MSCI Index and is not sponsored, endorsed, sold or promoted by MSCI, any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI Index. MSCI makes no warranties and bears no liability with respect to SPDR MSCI Australia Select High Dividend Yield Fund. MSCI has no responsibility for and does not participate in the management of the Fund assets or sale of the Fund shares. The PDS contains a more detailed description of the limited relationship MSCI has with SSgA. The information sheet is not intended to amount to advice or a recommendation to invest in SPDR. It does not take into account your investment objective, financial situation or particular needs. You should seek professional advice addressing your particular investment needs, objectives and financial circumstances before making an investment decision.] 2012 State Street Corporation - All Rights Reserved IBGAP-0481 5