Investors dump term deposits for yield stocks
Investors have been piling into the shares of the big banks and Telstra for their yields and that has contributed to the strong rises in their share prices. Those yields have come down, but are still attractive. Telstra's shares are on a dividend yield of more than 5.5 per cent. With the benefit of franking credits, Telstra shares have a grossed-up yield of more than 8 per cent, or about twice that of term deposits.
The shares of big banks are on grossed-up yields of between 7 and 9 per cent. The shares of Wesfarmers and Woolworths are on lower gross yields of about 6 per cent, but their share prices have also been driven sharply higher since the start of 2012 by investors chasing yield.
Investing in shares always entails risk and it is absurd to compare the risk of shares to term deposits on which the first $250,000 is covered by the government's deposit guarantee. But the risk of investing in these large, conservatively run companies is much less than that of investing in just about any other listed Australian company.
A lot of money is in term deposits and more of that is likely to be rotated from these when the deposits mature into the higher-yielding shares. Though the share prices in the higher-yielding stocks have been pushed more towards bubble territory, we are not there yet.
Telstra's position as the telecoms sector leader, and the oligopoly enjoyed by the big banks, makes them resilient businesses.
Most analysts think the shares of some of the big banks and Telstra could be slightly over-valued compared with earnings, perhaps by up to 10 or 15 per cent.
There are triggers that could cause their share prices to collapse, but it is hard to see how they could be pressed.
It would probably take sharply higher unemployment and a major downturn in property markets to do that. But low interest rates are good for economic growth and for corporate profits. Improved earnings of the higher yielders would help close any valuation gap.
Frequently Asked Questions about this Article…
With the best term deposit rates only a little above 4% and the cash rate at a record low, many investors are chasing higher yields in shares. Large, dividend-paying companies — notably the big banks and Telstra — are offering much higher grossed-up yields, so money held in maturing term deposits is being rotated into these yield stocks.
Term deposit rates are a little over 4%, whereas Telstra's dividend yield is more than 5.5% and, with franking credits, has a grossed-up yield of over 8%. The big banks have grossed-up yields roughly between 7% and 9%, making them considerably more attractive than current term deposit rates.
Franking credits attach to dividends and reduce the tax paid by shareholders, effectively increasing the after-tax return. The article notes that with the benefit of franking credits, Telstra's grossed-up yield rises to more than 8%, roughly double the yield from term deposits.
Investing in shares always carries risk, and term deposits have the safety of a government deposit guarantee (covering the first $250,000). However, the article argues that large, conservatively run companies such as Telstra and the big banks are less risky than most other listed Australian companies, even though they are not as safe as guaranteed term deposits.
Most analysts mentioned in the article think some of the big banks and Telstra could be slightly overvalued compared with earnings — perhaps by up to 10–15% — though the article suggests we are not yet in full ‘bubble’ territory.
The article says triggers that could cause their share prices to collapse would likely be severe: for example, sharply higher unemployment and a major downturn in property markets. Low interest rates, by contrast, support economic growth and corporate profits, which help these businesses.
Wesfarmers and Woolworths are on lower grossed-up yields — about 6% — than Telstra and the big banks. Their share prices have also risen sharply as investors chase yield, but their gross yields remain somewhat lower than the highest-yielding stocks.
Yes. The article suggests a lot of money is still sitting in term deposits and that more of it is likely to be rotated into higher-yielding shares as deposits mature, driven by the yield gap between deposits and dividend-paying stocks.
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