Faced with rock bottom term deposits and ever more risky “cash enhanced” products, conservative investors — especially retirees — will reconsider franked shares as the least worst option in an increasingly volatile investment market.
As investors struggle to get 2 per cent for cash deposits, the average dividend yield on the ASX is more than 4 per cent (dividend yield is the earnings on shares from dividends expressed as a percentage — it changes as share prices change).
For tax-free retirees — who continue to receive cash refunds linked with franking credits — the effective average returns can be closer to 6 per cent.
Don Hamson of Plato Investment Management — who runs a high-yield shares fund — says retirees living off cash-linked income will struggle to make ends meet.
“So, it is very timely for retirees to reconsider their income generating asset mix. Thankfully, given the somewhat surprising election result, retirees can continue to bank on receiving franking credits from Australian share investments,” Hamson suggested.
With Telstra losing favour among conservative investors, the revival of the hunt for yield plays straight into the hands of the big four banks — led by National Australia Bank which is currently showing a dividend yield close to 7 per cent before franking is taken into account.
Kristian Walesby, the CEO at ETF Securities, says the rate cut: “Will reduce the attraction of safer asset classes such as Australian bonds and cash”.
However, the problem for investors — and regulators — is that a swing back towards share market investments by the nation’s savers may ultimately endanger investment portfolios.
Cash investments held in banks are guaranteed by the government for values up to $250,000 per customer per bank. There are no such guarantees in the wider market of shares, property and enhanced cash products (enhanced cash products offer higher rates by mixing cash with investments such as mortgages to lift overall returns close to 4 per cent or higher).
The chief economist at AMP Capital, Shane Oliver, suggests “investors need to consider what is most important — getting a decent income flow from their investment or absolute stability in the capital value of that investment … Of course, the equation will turn less favourable if economic growth weakens too much”.
Financial advisers aiming to create stable income streams for clients will be concerned the initial sugar hit an official interest rate cut may offer shares may not last very long if the wider economy continues to soften.
With the prospect of more interest rates to come, older investors may also expand their investment holdings in related high-yield investments such as commercial property, infrastructure and even private equity style investments to create a higher rate of return.
Certainly, those who hold substantial savings in cash will be hurt further.
The global market strategist at JP Morgan Asset Management, Kerry Craig, put it this way, “another way to think about monetary stimulus is that its actually a penalty against savers. At last count there was more than $600bn in term deposits in Australia earning a fraction of what it used to, and likely even less in the coming months.”
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