In­come port­fo­lio: Vita Palestrant Hunt­ing for yield

In­vest­ing for to­tal re­turn, not just div­i­dends, is the way for­ward for re­tirees

Money Magazine Australia - - CONTENTS - STORY VITA PALESTRANT

It’s a quandary ev­ery re­tiree faces: how to get a higher yield with­out tak­ing on too much risk. In­ter­est rates are in the dol­drums and un­likely to budge any time soon while some of the share­mar­ket’s dar­lings, like Tel­stra, at­trac­tive for its div­i­dend in­come, have fal­tered.

Jonathan Philpot, a part­ner at HLB Mann Judd wealth man­age­ment, says pick­ing stocks on div­i­dends alone is risky. “If fu­ture earn­ings are go­ing to go back­wards, div­i­dends will al­ways fol­low that fall in earn­ings. It’s most im­por­tant you buy stocks with earn­ings still grow­ing.”

Tel­stra is a clas­sic ex­am­ple, he says. “Their earn­ings are go­ing to de­cline 20–30% over the next few years. That means div­i­dends will be de­clin­ing as well. They’ve been quite up­front about it. Div­i­dends have al­ready been cut this year and will be cut fur­ther next year.”

While many re­tirees got burnt dur­ing the GFC, Philpot says Aus­tralian shares are still the best place to look for a sta­ble in­come re­turn.

“Many peo­ple sold out near the bot­tom of the mar­ket in 2009 and 2010, and went into fixed in­ter­est in­vest­ments. At the time, they got very good yields and thought it was great: they had a se­cure in­vest­ment, the gov­ern­ment guar­an­tee and a re­turn of 7–8%. But in­ter­est rates have more than halved since then and they’ve ex­pe­ri­enced a mas­sive loss of in­come.

“The share­mar­ket back then was yield­ing about 4%, and it’s still yield­ing about 4%, so if they had stayed the course and had a di­ver­si­fied port­fo­lio with a good por­tion of it in Aus­tralian shares, their in­come lev­els would have been far more con­sis­tent over this pe­riod,” he says.

There’s no room for short­cuts. Philpot doesn’t like ETFs that match high-yield­ing shares be­cause “you are cap­tur­ing a lot of stocks you wouldn’t want to own. While their div­i­dends are high now, if earn­ings fall over the next cou­ple of years, the div­i­dends will suf­fer.”

Yield­ing re­sults

“The banks are prob­a­bly the safest ar­eas to look at for a con­sis­tent yield. They’ve had a rough 12–18 months with the Royal Com­mis­sion but it’s quite rare for the banks to go back­wards.

Gen­er­ally, a spread be­tween the banks is a pretty safe play,” says Philpot.

“They are con­sis­tent in what they pay out each year and over a long pe­riod of time, they’ve had earn­ings growth that’s ba­si­cally in line with the econ­omy.”

He also likes Syd­ney Air­port, Transur­ban and AGL. “Transur­ban has been a ter­rific stock for a long pe­riod of time in terms of yield and share price, which means, in ef­fect, your div­i­dend is in­creas­ing ev­ery year. AGL has al­ways paid a fairly good div­i­dend yield. It’s a lit­tle bit off at the mo­ment but it should bounce back. “Mac­quarie Group is also good for yield. It’s been a ter­rific stock for a long time, the div­i­dend is not as high as the Big 4 banks but it’s had a 4–5% yield for a long pe­riod of time and it con­tin­ues to grow.” In­sur­ers like The Aus­tralia Group or QBE also rate a men­tion.

“QBE has been a dread­ful stock for the past five years but there’s po­ten­tially a turn­ing point. If the in­sur­ance mar­ket starts to im­prove, they’ll im­prove their prof­its again. They’ve al­ways been a good div­i­dend payer. They’ve been smashed around in the Royal Com­mis­sion, so you’re buy­ing in at a low point.”

Fur­ther afield, James Hardie comes up be­cause of the US hous­ing re­cov­ery. “They might not have had such a great run over the past cou­ple of years but if they are start­ing to turn around in their cy­cle, they will have bet­ter div­i­dends over the next few years,” says Philpot.

The old favourites like prop­erty trusts and mort­gage funds don’t rate a men­tion. “Listed prop­erty trusts are not as good as they used to be and mort­gage funds have vir­tu­ally dis­ap­peared. They got into trou­ble dur­ing the GFC. Prop­erty funds that were over-geared got blown up as well. The ones that sur­vived are still around to­day. Their gear­ing lev­els are at a much lower rate than they were, which in ef­fect, low­ers re­turns,” he says.

Growth is good

“It’s not easy. Those who can will di­ver­sify across many types of in­vest­ment op­por­tu­ni­ties for both in­come and growth,” says Laura Men­schik, a di­rec­tor with WLM Fi­nan­cial.

“Those with a rea­son­able port­fo­lio have prob­a­bly seen an ad­viser and sorted out what they need as far as in­come and growth goes. But for peo­ple with very lit­tle who are see­ing it eroded, it’s a very dif­fi­cult thing for them,” she says.

“Un­til re­cently, a lot of peo­ple had term de­posits rolling over, es­pe­cially when rates were higher, and were say­ing ‘I can get 6%. Isn’t that won­der­ful?’ Now they are lucky to get 2.5%.” Men­schik takes into ac­count her client’s ob­jec­tives, their other in­vest­ments, their in­come re­quire­ments and ap­petite for risk. “We don’t fo­cus so much on the in­come yield, as the to­tal re­turn of the port­fo­lio.”

It will con­sist of dif­fer­ent “buck­ets” of cash, cash plus and medium to long-term in­vest­ments. “If the port­fo­lio has grown, you can trim a bit off the top – stuff the mat­tress so to speak. We look at the port­fo­lio from a dif­fer­ent view­point rather than only in­come.” She points out that the shares bought for yield – the banks, Tel­stra and Wool­worths – have fallen.

“For those that didn’t have to sell, the shares have come up a bit so their over­all wealth has re­mained the same. But you still have to look at the to­tal re­turn over a longer term. If you are look­ing at to­tal re­turn over a shorter term, well, you have to play safe.”

And when it comes to term de­posits, don’t let it roll. Shop around for rates and watch out for the traps. “Some prod­ucts have only hon­ey­moon rates so af­ter three, four or five months the 3.1% drops to 2.2%. There are dif­fer­ent ways of get­ting a slightly bet­ter rate but most peo­ple for­get or get ap­a­thetic. It’s sticky money for banks,” says Men­schik.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.