2. REGULAR INCOME

With any investment, a key consideration is to look at the time frame, and when you will need access to the money. This will influence which investment options are chosen.

For time frames of three years or less, capital stable assets such as cash or term deposits would probably be most appropriate. Money is easily accessible, and it is probably the safest investment option available, so there is little chance of losing it.

If the time frame is more than three years, options such as equity investments should be considered. These are more volatile over the short term but provide greater return potential over the long term.

EQUITIES

Australian shares are a standout at the moment, with a forecast average return of 8% a year on our 10-year projections. They provide the benefit of a growing income stream plus longterm capital growth.

With the good dividend yield available on the Australian sharemarket, investors don’t need to look any further for an income-specific product to generate their required income.

Compared with other asset classes, the Australian sharemarket’s income return is double that of international shares and nearly double the current one-year term deposit rates.

Most of the current return from Australian shares is made up of the dividend yield. The current yield on the ASX 200 shares index is 4.02% and is 80% franked (tax paid). This is a gross yield of 5.4%.

Bank stocks in particular provide an attractive dividend yield that is typically fully franked. CBA, for example, has a gross forecast dividend yield of 7%. CBA’s dividend has increased every year since floating in 1991, except for once in 2009.

Franking credits represent tax already paid at the company rate of 30%. Investors are therefore entitled to a personal tax offset to make up for the tax already paid by the company. This means they will only be required to pay “top up” tax to their marginal rate or will receive a refund if their marginal rate is below 30%.

Conversely, any interest earned on term deposits is taxed at the investor’s marginal rate, without any offsets.

This highlights the benefits of investing in Australian shares: not only does the share price rise over time but the dividend tends to keep pace with the share price, thus creating a growing income stream in a tax-effective way.

PROPERTY

Even property investments, after expenses, typically yield only between 2% and 3% in Sydney and Melbourne’s hot markets. While prices have risen strongly, rents have not followed at the same pace, thus direct property investments in many places provide a poor income return.

TERM DEPOSITS

With interest rates at all-time lows, one-year term deposits are returning under 3%, which is just above inflation.

Historically, one-year term deposit interest rates have tended to be comparable with the Australian sharemarket yield but for the past few years investors have been receiving a more attractive yield from shares with the added benefit of franking credits.

OTHER INCOME-BASED PRODUCTS

Investors could select investments that have a focus on high yield. There are income-based share funds available but they tend to be skewed toward the banks, which are already a significant part of the index. They can also be biased toward resources stocks when they are producing higher yields.

This strategy favours high yield over diversification, which means taking a greater amount