Australian shares remain the best option when investing for income

APAC News Australian shares remain the best option when investing for income

HIGHER RISK BUT FAR BETTER RETURNS IN THE EQUITY MARKET AS BANK DEPOSITS OFFER LITTLE TO INVESTORS

A look back at the past decade of investment returns shows that Australian equities have held up better than any other asset class while, unsurprisingly, term deposits are far and away the worst performers on investment returns

Marcus Reubenstein

Now that official interest rates have dipped below one per cent, it’s clear the days of zero, or little, risk investment returns are gone. Chief economist of AMP Capital Markets, Dr. Shane Oliver has charted the performance of seven different asset classes and the return on bank term deposits, he says, is “woeful”.

In order to generate income investors are going to have to move up the risk curve, however, as blue-chip shares are yielding more than four times the returns on bank deposits, they do not look all that risky. Conversely, those who favour other investments, particularly residential property, argue that the main driver of share prices is not so much macro-economic conditions and the underlying value of listed companies, rather investors coming into the market looking for yields.

Though optimistic about the long-term return on equities, Dr Oliver says there is risk, “As always, there are some risks investors must watch out for.”

One of the key risks, when searching for income producing shares, are companies paying high dividends while the foundations of the business are not rock solid. “A very high dividend yield,” he says, “may be a sign of a ‘value trap’ where current profits and dividends may be fine but there is an impending threat to the company and so the share price is low.

“Second, high distributions may also be unsustainable if they are being paid for out of debt and reflect excessive gearing or high-risk investments. There is no free lunch.”

If the equity market risk is balanced out across the ASX200 index, annual dividend payments are running around 4.3% of the value of the shares. Once franking credits are allowed for, this pushes up to around 5.6%.

APAC News Investment Yield Chart produced by AMP Capital
Equities and residential property remain the best yield performers of the asset classes most prefered by retail investors

For residential property, the yield is the annual value of rents as a percentage of the value of the property. On average in Australian capital cities it is about 4.2% for apartments and around 2.8% for houses. After allowing for costs, net rental yields are about two percentage points lower.

According to, leading independent property economist, Dr. Andrew Wilson of My Housing Market, the residential property market is trending higher and should continue to make sustainable gains. He says, “Auction numbers are now approaching last year’s levels at the same time with sellers increasingly keen to take advantage of the strongest market conditions since 2016.”

Dr Wilson publishes weekly auction clearance data, finding over the past weekend that clearance rates in Sydney and Melbourne were 80.8% and 78.1% respectively, compared with just 51% for both cities for same weekend in 2018.

From the chart above, it is clear that residential property returns are not that far behind where they were a decade ago; with the exception of shares, rental returns have in fact held up much better than all the other asset classes.    

Real estate investors can also look beyond the housing market for returns, for unlisted commercial property, yields are around 4.9%, and are only slightly lower for REITS (Real Estate Investment Trusts).

Another important consideration, when comparing returns in real estate and shares against that of bank deposits, is that those assets will provide capital growth whilst bank term deposits simply accrue interest, and a very miserly rate at that. Dr Oliver charted comparative returns going back 40 years, he found (assuming dividends were taken and not reinvested) $100,000 invested in shares in 1979 would be worth $1.31 million today, assuming bank interest was collected every year, a $100,000 bank deposit would still be worth $100,000 four decades later. And, of course, the greater part of that $100,000 would have been eaten away by inflation.

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