Why dice with the market
Stay alert if you are putting savings into shares, writes
IT’S a tough choice: savings accounts or shares?
Do you choose safe, boring bank deposits that pay little more than inflation, or volatile high-paying investments that can destroy your nerves?
Shares are much riskier than cash but a growing number of Aussies are using shares as a long-term savings option to combat low interest rates.
The numbers stack up – many of Australia’s strongest companies are paying dividend income above 4.5 per cent, or more than 6 per cent once you add their attached tax credits. Bank accounts are paying below 3 per cent.
But the shares strategy only works if you can sleep at night when the market swings violently, and if you are prepared to stick with the stocks for at least seven to 10 years to reduce the risk of capital loss.
Here are six steps to add shares into your savings. 1. Research quality companies with a long history of solid dividends, or get a broker or adviser to do it for you. Start with the big banks, Wesfarmers, Telstra, and BHP Billiton. 2. Diversify across several high-dividend companies to reduce risks. Choose individual stocks or go for exchange traded funds or managed funds. 3. Once you have a planned portfolio, contact a stockbroker (who may charge $100 a trade) or sign up with online brokers, like CommSec or ETrade. 4. Beware of very high dividends. Some stocks are paying 8, 9 or 10 per cent dividend yields because their share price has fallen sharply and the dividends will follow. 5. Hold on to the stocks for several years and watch the dividends rise over time as inflation pushes up company profits. If the income is more than you need, consider reinvesting it into shares. 6. Don’t be freaked out by sharp falls in share prices. During the GFC the big banks’ shares halved in value but their dividends dipped only slightly. Since then both share prices and dividends have climbed strongly.