INSIDE INVESTOR: The search for yield

The hunt for yield. It has been the most sought after quest by investors seeking a decent return on their money for several years now.

And Australians have now caught the bug. Until a year ago, it was easy. The big banks, all looking to reduce their reliance on offshore wholesale funding markets were offering decent interest rates on term deposits.

But with the Reserve Bank cutting official rates, and with Australians now reluctant to borrow, some of the more attractive term deposit rates have disappeared.

Investors have looked for alternatives. And for the past six months, they’ve shifted their cash out of the bank and stuck it in the bank – bank shares that is.

The reason? The dividend yield on bank shares has been delivering returns of up to 7 per cent. And that is on stocks that are relatively safe bets.

Not surprisingly, from July until the end of October, our banks enjoyed a stellar run on the local stock market. And it wasn’t just the banks. Telstra and other defensive stocks offering a decent return all attracted a flood of investors clamouring for stock.

Yield is calculated by taking the dividend and dividing by the share price. So as the share price moves higher, the yield drops.

Defensive stocks are shares in companies that generally are insulated against a downturn in the economy because they deliver necessities. Things like infrastructure, utilities and even some food companies and supermarkets fall into this category. And in these uncertain times, that is precisely what everyone has been seeking – safety, security and a reasonable return.

Shares are inherently more risky than term deposits. In the event of a company collapse, shareholders stand last in line.

So for that extra risk, you should expect to be paid a bigger return. When the economy is booming and markets are running hot, many stock market investors are willing to overlook yield in favour of capital gain. They are more interested in making a profit from rising share prices.

For the past three years, however, our stock market has gone nowhere. There has been the odd run up. But international instability and a strong Australian dollar have conspired to keep a lid on stock prices. In fact, our market now is sitting around 50 per cent below its 2007 peak.

With little hope of a decent long term rally any time soon, and declining interest rates, the smart money has turned to yield.