Exploring equities as an income options for retirees in 2020

Determining the best option for income investment can be a challenging task, and retirees in particular have a specific set of needs that set them apart from other investors.

A decade ago, generating an income in excess of six per cent was very achievable, and could be diversified across a number of relatively low-risk asset classes such as long-term bonds, term deposits and residential property.

Today, however, it’s a different story, with fixed income and annuities returning record-low yields. High income options are now very limited, and investors must search hard and take on a level of additional risk in order to secure sufficient and reliable yields. In this environment, equities look to be the best way forward.

Not only are equities able to generate strong cash flows, in many cases they also provide franking credits. Having escaped regulatory risk in the May federal election, franking credits have become a very important and stable driver of income returns in a retiree investor’s portfolio.

Alongside stable legislation there has also been a record number of franking credits dispensed in the Australian share market. Companies are delivering record amounts of franking credits through dividends, a massive number of off-market buybacks and increased special dividends. The record was set in 2018 and the second half of 2019 saw a strong run rate, suggesting promise for this profitable trend to continue.

We believe that performance in equities will only increase over the short term . Returns from franking credits alone are currently almost equivalent to returns across cash, bonds and credit, and are higher than term deposits, fixed income or annuities.

Overall, taking advantage of franked dividends and franking from buybacks through Australian equities looks set to be an increasingly valuable part of a retiree’s ability to drive income from their portfolio over the next few years.