Investors will need to prepare for their retirement, regardless of the tough measures brought down in the Federal budget, and the focus on dividends is set to remain a feature of pre and post retirement planning, says Equity Trustees’ chief investment officer, George Boubouras.
“The current economic and political conditions only serve to drive additional investor demand for yield,” Mr Boubouras says.
“The increased emphasis on self reliance in retirement, combined with the ageing demographics and low interest rate environment, mean investors will continue to need a reliable income stream, in the form of franked dividends, from their equity portfolios.”
It is not only retirees who will benefit from a reliable source of income from growth assets.
“Exposure to growth assets, with consistent reinvestment, in the years and decades prior to retirement, will go a long way to meeting retirement income expectations,” Mr Boubouras says.
“The performance of the local equity market, with its tax paid dividends, combined with continued low interest rates, means Australian investors are already accustomed to targeting equity investments that pay a consistent dividend stream over time.
“Importantly, the Australian equity market has historically recorded a higher payout ratio compared to international equity markets, a fact which has rewarded those who invest in the local market.”
Mr Boubouras says an equity portfolio focused on yield will be trading off higher future earnings growth for a higher dividend yield
“Currently equity market yields are 4.6 per cent. Investors who are focusing on the dividend yield, should be targeting an equity portfolio that is returning a yield of 7.5 per cent, once grossed up for franking credits.
“That is an attractive return for partially or fully self funded retirees.”
He says the sectors set to benefit from this search for yield include telcos, utilities, infrastructure, gaming, consumer staples, banks, diversified financials and listed property trusts.
Mr Boubouras says the tough budget will initially be contractionary, meaning it is less likely that the Reserve Bank of Australia (RBA) will raise interest rates in the near future. Additionally, the high Australian dollar will continue to place pressure on Australian companies.
“The current economic situation, combined with the measures brought down in the Federal budget, mean the RBA is likely to keep rates steady at least until 2015.
“This lower rate for longer outlook will ensure investors will continue to search for more yield elsewhere. Those ASX listed companies providing strong, sustainable yields, greater than the ASX200 over time, are set to benefit,” Mr Boubouras concludes.
Equity Trustees Limited (EQT) is a publicly listed company that provides a range of financial services to corporate and private clients. Its businesses include asset management, distribution, responsible entity appointments, private client wealth management, and corporate and personal superannuation.
For more information please contact:
Lisa Barp – Phone: 03 8623 5396
14 May 2014