FYI | Dec 09 2020
By Peter Switzer, Switzer Report
Desperately seeking income from stocks? Read this!
A number of questioners from the Switzer webinar asked about reliable dividend payers. This is a good question, given the banks have been basically ordered by APRA to keep their dividends under 50% of their profits. To those dependent on bank dividends, the news of a faster-than-expected economic comeback (as shown by the 3.3% growth in the September quarter), on top of the great vaccine news, tells me that bank dividends will improve over 2021. And by 2022, we could see some really good bank payments to their shareholders.
To one webinar attendee, I suggested he looks at the top holdings of well-known share/income funds. I said my own Switzer Dividend shows its top 10 holdings, which has to say a lot about what my portfolio manager thinks will help him get at least a good result. Here are to the current Top 10 holdings:
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This list is quite instructive but as this is a dividend growth fund, some stocks are actually in the fund for growth. CSL is a case in point, as it’s not known for its dividend, but it does depend on what price you bought the stock. Last year’s full dividend was $2.95. If you bought CSL for the first time on July 27 at $270, you’re lucky to get 1%.
However, if my portfolio manager bought it then, he’s looking at a 9% growth gain for the portfolio. But if he bought the stock for the fund in November 2016 at $100, he’d be getting a 2.95% income payment.
That’s unlikely because he’d be buying CSL at many different times and at higher prices, as more and more money comes into the fund.
But the educational point is there for you. My Macquarie shares bought for $23 in 2008 are now yielding 11.7% on the $2.70 dividend!
Buying dividend-payers when markets crash is a great strategy. It’s why I’ve told you countless times to buy on significant dips and why I believe in the long-run pay-off of quality stocks, assuming you have at least 15 of them in your portfolio.
My portfolio manager holds over 30 but he has a team to help him to look after his ‘flock’. And this builds the case for relying on a pro-fund for harvesting income.
I think there is an argument that an income chaser, who’d rather have a government-guaranteed term deposit, could create a ‘fund of funds’ income fund and do pretty well. Vanguard has a local-based income fund (VHY) that has a different strategy compared to SWTZ and its low fees would bring down the more expensive funds that are more active and, therefore, have higher fees.
BetaShares has its HVST income fund that aims to provide exposure to large-cap Australian shares with a goal to beat the yield of S&P/ASX 200 exchange traded funds.
Fund manager Perennial Investment Management has an eInvest group of products and one (eInvest Income Generator Fund (EIGA)) says it’s targeting a gross income yield of 7% p.a. (comprising a 5% cash dividend yield and 2% franking credits)
Of course, none of these funds can guarantee they’ll deliver on their goals but there are professionals trying their darndest to make it happen.
Because of the Coronavirus, many of these funds will probably deliver returns of around 3% plus franking, so 5% is more likely. But 2021 will probably bring better numbers.
All these funds are based on local stocks but you could even add in a foreign dividend-paying exchange traded fund or a local or foreign bond fund to give your fund of funds more diversification.
In an age when the safest of safe term deposits can’t give you enough to grow your portfolio or pay your lifestyle expenses, investing in reliable assets (which could play havoc with your capital in the short term but generally not in the long term) might be what you need to consider.
S&P/ASX Accumulation Index
The above chart shows the capital gain/loss plus income paid for the Aussie stock market. The dips are when capital-worried share players would’ve had sleepless nights if they weren’t long-term thinkers.
Those who are long-term-oriented investors know that the capital gain resumes, and income grows as well. If you’re really determined to get reliable income, maybe a fund of funds based on income-chasers makes a lot of sense. But you will have to be prepared for those big, bad scary sell offs, which, in the fullness of time, are buying opportunities.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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