High-yield shares are a haven in the storm

A HANDFUL of stocks stood out yesterday as the Australian sharemarket absorbed more bad news about Europe, employment rates in the US and weaker manufacturing in China.

By InvestSMART · 5 Jun 2012

By InvestSMART ·
5 Jun 2012

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A HANDFUL of stocks stood out yesterday as the Australian sharemarket absorbed more bad news about Europe, employment rates in the US and weaker manufacturing in China.

Amid the sea of red were a few green numbers mostly stocks with high yields that were unlikely to be affected by a slowdown in global growth.

A 2? gain in Telstra's share price was enough to make telecommunications the only positive sector yesterday. Telstra shares closed at $3.66, but reached $3.68 during trading its highest intraday level since May 15. Trading volumes were unusually high.

RBS private client adviser Simon Ferguson said clients were selling any speculative holdings they might still have, shares in miners and shares in mining-related companies and buying sturdy high-yielding shares instead.

Telstra has a yield of nearly 11 per cent and the management has guaranteed a fully franked 28? dividend for this and next financial year.

"That yield is looking far more attractive in a falling interest rate environment," Mr Ferguson said. "[Telstra] could go up to $4 and still be on a higher yield than comparative companies."

The Reserve Bank board will meet this afternoon and is expected to cut the official cash rate by at least 25 basis points to 3.5 per cent, the lowest since November 2009.

Telstra shares have been trading at two-year highs since chief executive David Thodey announced it would have between $2 billion and $3 billion in excess free cash flow over the next three years from its deal with NBN Co.

Other high-yielding stocks outperformed the S&P/ASX 200 yesterday, according to Aberdeen Asset Management portfolio manager Michelle Lopez.

"Stocks like Telstra, like utilities, they are steady cash-flow generators [and] are always going to be more attractive," Mrs Lopez said.

Tatts Group has a yield of 12 per cent and its shares rose 7? to $2.60 yesterday, gaining 1.1 per cent.

And electricity provider SP Ausnet closed 0.5 per cent higher, while the the market as a whole fell 1.9 per cent. SP Ausnet has a 12-month yield of about 8 per cent and has 90 per cent of its cash flow guaranteed through regulation, according to Mrs Lopez.

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Frequently Asked Questions about this Article…

Why were high-yield shares seen as a safe bet when the Australian sharemarket fell?

High-yield shares were favoured because they tend to deliver steady cash flow and dependable dividends, making them less sensitive to weak global growth. The article notes investors shifted out of speculative and mining stocks into sturdy, high-yielding names, and that these stocks outperformed the S&P/ASX 200 during the sell-off.

What made Telstra an attractive high-yield stock for everyday investors?

Telstra stood out because it offers a yield of nearly 11% and management guaranteed a fully franked 28¢ dividend for this and next financial year. Its shares reached an intraday high of $3.68 (closing $3.66) with unusually high volumes, and management expects $2–3 billion in excess free cash flow over the next three years from the NBN Co deal — all features that appealed to yield-focused investors.

How might an RBA cash rate cut affect high-yield shares?

A cut in the official cash rate makes dividend yields more attractive relative to interest-bearing investments. The article cites expectations the Reserve Bank would cut rates to about 3.5%, and advisers said that in a falling interest-rate environment yields like Telstra’s look much more appealing to investors.

What actions were advisers recommending to clients during the market downturn?

According to RBS private client adviser Simon Ferguson, clients were selling speculative holdings and mining-related shares and reallocating into sturdy, high-yielding stocks that are less likely to be hit by a global slowdown.

Which other high-yielding ASX companies were highlighted and what were their yields?

The article mentions Tatts Group with a yield of about 12% (shares rose 1.1% to $2.60) and SP AusNet, which has a 12-month yield of roughly 8% and closed 0.5% higher. SP AusNet also has about 90% of its cash flow guaranteed through regulation.

Why are utilities and steady cash-flow businesses popular when markets are volatile?

Utilities and other steady cash-flow businesses are popular because they consistently generate cash and dividends even when economic growth slows. Aberdeen portfolio manager Michelle Lopez said these kinds of stocks are attractive for income-seeking investors and tended to outperform the broader index in the reported market weakness.

Are high-yield shares completely immune to a global economic slowdown?

No — they’re not completely immune. The article explains high-yield shares are generally less likely to be affected by slower global growth because of stable cash flows and regulatory protections (in some cases), but they can still be impacted by broader market conditions. Investors see them as relatively more defensive, not risk-free.

How did the overall market performance compare with the performance of these high-yield stocks on the day described?

On the day described the market fell around 1.9%, yet some high-yield names outperformed: Telstra was up about 2% (making telecommunications the only positive sector), Tatts Group rose 1.1%, and SP AusNet closed 0.5% higher — showing how yield-focused stocks held up better than the market as a whole.