Income investment turned upside down

Low interest rates combined with increasingly attractive yields on the share market mean traditional ideas about the role of bonds and stocks need to be re-examined, new research suggests.

Wednesday, May 16th 2012, 6:00AM

by Niko Kloeten

Craig Stent, research analyst at Harbour Asset Management, said that several significant forces are changing the way we think about “balanced” portfolios.

“First interest rates are near record lows – it is getting harder to generate real after tax and fee returns from cash and bond portfolios,” he said.

“As a result, investors now face a reducing income stream from their portfolios as the traditional sources are failing in providing sufficient returns to meet the investor’s income needs.

“Secondly, equity market valuations seem attractive and the equity market is yielding a lot more than term deposits or corporate bonds.

“Third, pooled Portfolio Investment Entity (PIE) funds have attractive efficiency and tax characteristics for many New Zealand investors.”

Stent said yields for New Zealand cash, term deposits and bonds are “substantially lower” than at any time in the past 10 years.

The running yield on corporate investment grade bonds is about 4.6%, compared to the average yield of 6.8% over the past decade; six month term deposits are about 4.1% compared to an average over about 5.8% over the past decade.

Meanwhile, equities yield more today in New Zealand and Australia than they have in the past 10 years.

“After taking into account imputation credits, the New Zealand market today yields 7.2%, compared to the last decade average of 6.8%,” Stent said.

“In Australia, the gap for the Industrial market is even wider; with the average non-resource stock yielding 6.0% (excluding franking credits) compared to the last ten year average of only 4.8%.”

And the generous dividends on offer in the New Zealand stock market are likely to continue, he said.

“If anything market dividend yields may increase with the proposed listing of the SOE electricity companies plus the recent splitting of the Telecom business, all of which may provide reasonable yields.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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