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The income story

The dividend yield story of the New Zealand sharemarket has been overlooked by many investors. Philip Macalister explains how good it is.

Tuesday, November 11th 1997, 12:00AM

by Philip Macalister

There’s a standard fall back position for investors when the sharemarket gets choppy like it has in the past fortnight.
It’s the old story of buying defensive stocks with good dividend yields.
It’s also a story which makes the New Zealand sharemarket particularly attractive at present as the average dividend yield is running at an historically high level.
Currently the market has an average dividend yield of 4.5 per cent, while in the United States the comparable figure is 1.6 per cent, and in Australia the yield is about 3.2 per cent.

Auckland-based financial planner Norman Stacey of Diversified Investment Strategies says the income potential of the New Zealand sharemarket is overlooked by many investors.
This he says is partly due to the high interest rates that can be achieved from cash and bank deposits.
It’s a view shared by J B Were and Son’s manager of private stock broking Guy Hedley. While the average yield is 4.5 per cent it is not difficult to build a diversified portfolio which generates a dividend yield of more than 9 per cent without accepting undue risk.
The eight stocks currently in J B Were’s Personal Investment Portfolio Service’s (PIPS) income portfolio have dividend yields ranging from just over 4 per cent (INL) to 15 per cent (Cavalier Corporation).
“Five of the stocks have yields of more than 8 per cent,” Hedley says.
He says when the markets become volatile and questions are raised about future growth prospects the income story comes back into vogue.
“It’s much maligned, it’s considered boring, but it works beautifully,” he says. “The income story has been a quiet achiever despite the markets being volatile.”
New Zealand Funds Management portfolio manager Tim Mitchell says the tax structure in Australia and New Zealand encourages companies to pay out a large proportion of their profits, and attach imputation credits.
While such a practice may hinder future growth of companies it provides investors with good income streams.
Mitchell says the volatility in the market has presented some excellent opportunities to lock in high yields.
Telecom is an example of how. When its shareprice hit $6.95 recently its gross dividend yield rose to 9.2 per cent on current year earnings, and that yield ballooned out to more than 10 per cent when calculated using the estimated cash dividend of 46 cents for the next year.
That’s a income far superior to what any bank could offer investors, but it also has the added attraction of capital appreciation.
“I think the tendency in the past has been to be in shares for earnings growth,” he says. “But with low inflation and the prospects of interest rates going lower income streams will become a more and more striking feature of the market.”
“We might see a tendency to focus on that income stream,” he says.
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