InvestSMART

A regal rate of return

Despite a strong cash rate, dividends on bank stocks make for a royally attractive proposition.

Despite a strong cash rate, dividends on bank stocks make for a royally attractive proposition.

ALL right, so cash is king but don't expect a long reign.

It happens once in a generation.

The last time it was better holding cash - not under the mattress but in a term deposit or a savings account - than shares or anything else, really, in 30 years was in 1994 when everything came unstuck because the Reserve Bank lifted interest rates 2.75 per cent.

Even after being given that leg-up, cash went on to be trounced a year later. And every one since, though not always by shares.

If it did turn out to be the best performer this year, judging by its form there's only a 6.25 per cent chance of a repeat performance. Even boring old government bonds are proving a better bet.

In fact they're booming because the world's central banks are looking for something better-paying, and technically safer, than US bonds.

As demand pushes up the market prices of bonds, there's less interest bang per buck.

On a 10-year maturity, for example, the yield has dropped 0.5 per cent, a gain of 10 per cent in three months.

Normally bonds are just a longer version of the official cash rate but the two ends have been going in different directions, something that must be a keen topic over morning tea at the Reserve Bank.

Cash deposited overnight pays more than a longer dated bond, despite being the difference between a one-night stand and a long-term commitment.

For some reason the lowest rate of all is on a three-year maturity, pulling down the corresponding fixed-loan and term-deposit rates. Fortunately, the rising bond values are helping save your super.

You're probably in a balanced fund where up to half your money is invested in bonds of one sort or another.

That's, er, super for super but it still doesn't get around the problem of falling interest. Surely there's something that's also reasonably safe.

Ah, what's that poking out of the wreckage of the sharemarket? A battered bank stock.

The dividends on bank stocks are yielding an unprecedented 10 per cent a year with the 30 per cent tax credit from franked dividends. True, that's the result of their shares having been trashed. But this was over worries about Europe which have nothing to do with our banks.

For all its bad-hair years, the sharemarket has been increasing on average by 8 per cent a year after inflation over the past century, so getting virtually that from the dividend alone must say something.

That it won't continue, perhaps?

Well, it's true the banks do love a good borrowing binge but those days are over.

While that rules out any decent growth the thing is they could stand still and at a pinch live off the loans they've already made.

So the yields compensate for what's likely to be a stagnating share price.

Anyway their shareholders are very particular about their dividends, which you'll notice are increasing even in this soft patch.

Frankly, their share prices could drop another 5 per cent and you'd still get more after tax than from cash.

Best just to close your eyes and think of them as a term deposit you can't touch.


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