The Hunt for Yield Is On, Don’t Be Fooled

‘…The United States, because of the Federal Reserve, is paying a MUCH higher Interest Rate than other competing countries. They can’t believe how lucky they are that Jay Powell & the Fed don’t have a clue. And now, on top of it all, the Oil hit. Big Interest Rate Drop, Stimulus!’

Guess who?

Yes, who else but President Trump tweeting up a storm as usual yesterday.

It seems he dislikes central bankers as much as we do!

But for very different reasons…

You can see his reasons here:

Source: Mining.com
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These five regions (which includes the Eurozone) are firmly in negative interest rate territory. And Trump thinks they have an unfair advantage because of it.

US–China trade tensions have actually created some incredible opportunities for Aussie investors. Click here to discover three unique plays on the US–China trade war.

Now I won’t go into the craziness of this situation today. We’ll leave that ‘Alice in Wonderland’ tale for another day.

But the fact is that these days you have to invest in a world where money in the bank pays very little interest, if anything at all.

Which leads to a global hunt for yield.

Today, let’s look at your options…

The REIT play

First you could invest in property funds.

REITs (Real Estate Investment Trusts) are a popular way to buy shares in a portfolio of commercial properties that are run by a property manager.

Just like with residential property, the returns are generated by the rents received.

Here are six popular options in Australia:

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As you can see, some REITs are generating dividend yields as high as 7%.

That’s a lot more than the 2% being offered by banks in savings accounts.

But a word of warning here…

REITs are a more risky investment. The dividend yield relies on the rent being paid. In tough economic times, shops close, tenants flee and landlords are left with less rent, so that can affect the dividend paid out.

And don’t forget the value of the buildings that make up your portfolio can fall as well as rise. So your capital invested may go down — as well as up.

Also, not all REITs are the same.

You can see that from the returns in the above table.

Shares in REITs like Scentre Group, which are more focused on owning big shopping centres, have struggled more than REITs like Goodman Group, which are more focused on industrial property.

You need to do your research here and look beyond the headline yield figure…

The dividend strategy

Australian investors have long benefitted from a tax system which favours dividend payments more than most other countries.

Yes, I’m talking about franking credits.

This added bonus can bring the dividend yield on a bank stock like the CBA up from 5.34% to 7.63%!

And in an unchanging world, locking up your funds in the dividend paying banks or supermarkets would be a safe and easy way to generate some nice income streams.

However…

The world is changing. And changing fast.

As I’ve been banging on over the last few months, the banking sector in Australia is going to be in for a tumultuous year ahead.

Nimble neobanks and fintech challengers are attacking them all over the place.

And the banks are going to have to reallocate a lot of their resources to technology to try and keep up. This will put pressure on their ability to maintain their current dividend yield.

And if they start to lose business too, then their share prices could fall sharply as well.

I’m not saying this will definitely happen. But it is a major risk you need to account for.

Investing in infrastructure

Infrastructure is another ‘income-generating’ asset you could look into.

In the past this has done quite well.

Sydney Airport’s five-year returns work out to 18% per annum. And toll road operator Transurban Group has delivered 20%.

With the Australian government investing $100 billion over 10 years in transport infrastructure, there’s certainly going to be a lot of options here for you to consider.

But don’t forget, you also have the choice of investing in funds that also invest overseas.

In a way that might be a good way to hedge your portfolio against falls in the Australian dollar?

Something to consider at least…

The takeaway

The main thing is to make sure you look beyond the headline yield.

A good headline yield can hide numerous risks in the business. Make sure you don’t fall for that trick.

Find an investment opportunity first, then look at the yield second. Not the other way around.

And don’t forget companies that are growing their earnings regularly can become the next big dividend stocks, even if their divided yields are low now.

So, in a surprising way, certain small and mid-cap stocks can be the best yield plays if you’re smart about it.

If you’re interested, check out my colleague Sam Volkerings top three small-cap picks that he believes could smash the ASX here. 

Good investing,

Ryan Dinse,
Editor, Money Morning