Investment Strategy

Why shares will continue to be a good source of income

By AMP Capital

According to Dr Shane Oliver, Chief Economist, the current ‘lower for longer’ risk free rate environment means the share market will continue to be a place where self-directed investors seek out yield.

We may be in an interest rate rising cycle, but it will still be some time before investors can hope to earn reasonable income on their cash holdings.

This ‘lower for longer’ risk free rate environment means the share market will continue to be a place where self-directed investors seek out yield, says Shane Oliver, AMP Capital’s Chief Economist.

While the US Federal Reserve has begun to raise rates, the Reserve Bank of Australia is probably unlikely to start raising rates locally until 2019, Oliver says.

“This means if you want decent income you have to look beyond deposits,” Shane says.

On average, investors can earn about 4.5 per cent income in the Australian equities market.

“If you add in franking credits to this then you’re pushing up towards 6 per cent [yield],” Oliver notes.

Investing in the share market specifically for yield is not without its risks. As so called “bond proxies” in the listed market have become expensive, at a time when risk free rates have been at historic lows, some experts say it makes more sense for investors to think about total return rather than yield on its own.

Investors looking to the share market specifically for yield should be thinking about how sustainable dividend yields indeed are and companies’ ability to grow those yields.

Banks and telecommunications companies have in the past been known for their sustainable dividends, but a recent article highlighted that this may not always be the case.

Franking credits can help boost stocks’ income earnings potential, Oliver notes.

“If you’re after franking credits, you have to look for companies which get a good portion of their earning out of Australia and pay tax on those earnings,” he says.

Oliver also notes that investors seeking to invest in stocks for their dividend earnings potential should ensure they’re also thinking about portfolio diversification.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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