02 9683 5999The S&P200 Accumulation Index finished trading up 4.95% in January. The market rallied strongly in the 2012 calendar year. The Australian share market posted its best calendar year performance since 2009 finishing up 20.26%. In early January 2013 global equity markets including Australia rallied strongly post the US Fiscal Cliff resolution, and more positive Chinese Data.
In our past two updates we wrote about the importance of growing franked dividends. In this update we look at the potential for a sustained period of low interest rates. We also explore the risk in simply picking the highest yielding stocks. For the past 3 years Australia has had the highest interest rates of the developed nations. This was primarily due to record commodity prices and record levels of capital expenditure in the mining sector. With commodity prices moderating, capital expenditure is forecast to peak in the next 12 months.
Below is some recent interesting research from Goldman Sachs JB Were;
- The RBA has cut rates from 4.75% a year ago to now 3.00%. When we talk to people outside of the finance industry most think that rates will not stay here long.
- Most expect rates to go back up next year but as many of you know there is an income shock coming to Australia. The RBA is positioning for this and they will take rates down to 2.50% sometime in the next 12 months.
- Now rates are going lower, not higher and we are soon going to see rates at 50 year lows. What no one has lived through is a ‘sustained period of low rates’. One where yield will dominate.
- Those companies with high dividend yields will see their share prices continue to work higher as investors chase higher yields relative to what banks will be offering.
We are seeing client’s rolling over term deposits from 6% when they locked in a while ago with some now being offered 3.9%. As term deposit rates continue to decrease, some of the $300 Billion that went into bank deposits in the last 3 years will move back into high yield Australian shares.
Lastly a question that we get asked frequently is why you don’t just pick the stocks with the highest dividend yield. The simple answer is that often the companies that pay a very high dividend one year will often decrease their dividend the next.
We target high quality companies that have a growing sustainable dividend yields. The analysis of dividends forms part of our detailed research process. The criteria we use for determining whether a company’s dividend is sustainable include the following;
- A well managed company that is growing it earnings and profits.
- Company should have a five-year dividend track record and ideally the dividend payment has never have been reduced during that period.
- Average dividend pay-out ratio (dividends/profits) to be no higher than 80% over a three-year period (no more than 60% for a capital-intensive business). A constant high dividend pay-out ratio increases the risk of a capital raising, which will either cause you a cash outflow or dilution.
- Special dividends paid solely out of the proceeds of an asset sale should be excluded from the calculation.
