COVER STORYWHERE TO INVEST $200PW OVER 5 YEARS
STORY
JONATHAN
PHILPOTCBA,forexample,hasagrossforecastdividend
yieldof7%.CBA’sdividendhasincreased
every year since floating in 1991, except for
once in 2009.
Franking credits represent tax already paid
at the company rate of 30%. Investors are
thereforeentitledtoapersonaltaxoffsetto
make up for the tax already paid by the com-
pany. This means they will only be required
topay“topup”taxtotheirmarginalrateor
will receive a refund if their marginal rate
is below 30%.
Conversely, any interest earned on term
deposits is taxed at the investor’s marginal
rate, without any offsets.
This highlights the benefits of investing
in Australian shares: not only does the share
priceriseovertimebutthedividendtendsto
keep pace with the share price, thus creating a
growing income stream in a tax-effective way.PROPERTY
Even property investments, after expenses,
typically yield only between 2% and 3% in
Sydney and Melbourne’s hot markets. While
prices have risen strongly, rents have notfollowed at the same pace, thus direct property
investments in many places provide a poor
income return.TERM DEPOSITS
With interest rates at all-time lows, one-year
term deposits are returning under 3%, which
is just above inflation.
Historically,one-yeartermdepositinterest
rateshavetendedtobecomparablewiththe
Australian sharemarket yield but for the past
few years investors have been receiving a more
attractiveyieldfromshareswith the added
benefitoffrankingcredits.OTHER INCOME-BASED
PRODUCTS
Investorscouldselectinvestmentsthathave
a focus on high yield. There are income-based
sharefundsavailablebuttheytendtobe
skewed toward the banks, which are already
a significant part of the index. They can also
be biased toward resources stocks when they
are producing higher yields.
Thisstrategyfavourshighyieldoverdiversi-
fication, which means taking a greater amount- REGULAR
INCOME
W
ith any investment, a key
consideration is to look at
thetimeframe,andwhen
youwillneedaccesstothe
money. This will influence
which investment options are chosen.
Fortimeframesofthreeyearsorless,capital
stable assets such as cash or term deposits
would probably be most appropriate. Money is
easily accessible, and it is probably the safest
investmentoptionavailable,sothereislittle
chance of losing it.
If the time frame is more than three years,
options such as equity investments should be
considered. These are more volatile over the
shorttermbutprovidegreater return potential
over the long term.EQUITIES
Australian shares are a standout at the moment,
withaforecastaveragereturnof8%ayear
on our 10-year projections. They provide the
benefit of a growing income stream plus long-
term capital growth.
Withthegooddividendyieldavailableon
the Australian sharemarket, investors don’t
need to look any further for an income-specific
product to generate their required income.
Compared with other asset classes, the
Australian sharemarket’s income return is
double that of international shares and nearly
doublethecurrentone-yeartermdepositrates.
Most of the current return from Australian
sharesismadeupofthedividendyield.The
current yield on the ASX 200 shares index is
4.02% and is 80% franked (tax paid). This is
agrossyieldof5.4%.
Bank stocks in particular provide an attractive
dividend yield that is typically fully franked.