INSIDE INVESTOR: Casting a wider net for yield

When money went yield-chasing in the stock market as interest rates plummeted, the banks were the first to be snapped up. But now the smart money is looking elsewhere.

If there was a single defining feature about the stock market recovery in the second half of 2012, it could be summed up in a single word: yield.

Dress it up how you like, but yield simply is the dividend a company pays on its shares, divided by the share price. So a share costing $1 that pays a 10 cent dividend is delivering a 10 per cent yield.

When Glenn Stevens began taking the machete to official interest rates in late 2011, stock market investors were non-plussed about the whole affair.

By the middle of the year, however, as the Reserve Bank kept lopping more from official rates and term deposit rates began a rapid descent, the juicy returns from listed companies began to look particularly enticing.

The banks were the first beneficiaries as investors adopted the attitude: If you can’t beat ‘em, buy ‘em. By year end, the rise in bank shares accounted for half the gains in the overall stock market.

Even companies like Telstra, that had been out of favour for years, became favourites for investors who tipped more cash into anything paying good strong and reliable dividends.

But as those share prices pushed higher, the yields diminished. Some companies compensated by paying bigger dividends. But that virtuous circle can’t continue indefinitely. There comes a point when a company simply can’t afford to pay any more, unless its earnings and cash flows improve significantly.

That’s when the smart money began taking a serious look at other sectors, those that had been overlooked in the rush for yield. As is usually the case in these situations, those that had been shunned had been the ones hardest hit during the financial crisis, the ones that left investors with charred fingers in 2008.

Top of the list were the real estate investment trusts. Despite being high-flyers in the years leading up to the crash, they’ve spent the past four years in purgatory, in a desperate bid to get their houses in order. Many now are reaping the benefits of the pain they have endured. And they are paying decent dividends.

More to the point, they are not stretched on the dividend front. Most have plenty of gas in the tank to keep dividends rising this year and beyond.

A good point to remember here is, don’t just look at the overall yield a company is paying. Do some homework and figure out whether a company can maintain its dividend stream or better still, increase it in the years ahead.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles