The current low interest rate environment has led many income focused investors to look for assets which produce a higher level of yield than cash. Often these investors have chosen Australian shares which pay strong dividends and have franking credits attached. However, the events of the past month have been a timely reminder that dividends are not guaranteed and can be cut at any time, without warning.
Over the past month, a number of blue chip companies have significantly reduced their dividends. Both Woolworths (dividend from A$0.67 per share to A$0.44) and BHP (dividend down from US$0.62 per share to US$0.16 per share) have recently cut their dividends. In addition, both BHP and Rio Tinto have abandoned their ‘progressive dividend’ policies (under which the companies committed to increasing their dividend each year) in favour of a dividend payment model which would link the amount paid out in dividends to the company’s underlying profits.
It is important to remember that all asset classes operate within market cycles. Even though companies such as BHP and Woolworths have recently reduced their dividends, we believe that a diversified portfolio of Australian blue chip shares is still likely to provide a steady stream of income that will grow faster than the rate of inflation over a 7 to 10 year business cycle. At Harvest, this is what we have historically been able to achieve for our clients through the investments we have recommended.
There are also a number of other asset classes which can produce a strong growing income return:
In this asset class we focus on identifying trusts for our clients which own an underlying portfolio of ‘A grade’ commercial properties. We continue to identify quality commercial property investments which provide an annual income return of at least 7% and include these as part of a diversified portfolio for our clients.
Traditionally, global shares have provided small income returns and high capital growth. Recently however, a number of large global companies with strong balance sheets have begun to distribute a larger portion of their income. We have identified a limited number of opportunities to invest in high yield global shares, and in doing so, add further sector diversification to our clients income focused portfolios.
When developing portfolios for our clients who are approaching or in retirement, we are focused on total returns, considering both capital growth and income returns while managing risk through sector and asset class diversification.