Rising yields may tempt nervous investors back into equities

YIELDS on the stockmarket are heading upwards as the official cash rate is expected to be cut below 4 per cent, enticing investors to shift assets from the safety of cash back into equities.

YIELDS on the stockmarket are heading upwards as the official cash rate is expected to be cut below 4 per cent, enticing investors to shift assets from the safety of cash back into equities.

The big four banks were expected to return between 7 and 8 per cent this year, fully franked, while Telstra's guaranteed dividend gives it a yield of 8.3 per cent at the current price of $3.36. Some shares were pushing 16 per cent, such as bread maker Goodman Fielder at a 15.5 per cent yield, but this was not all good news, the head of equities at AustralianSuper, Innes McKeand, said.

"If there is nearly 16 per cent in dividend yield available ... that is an exceptionally attractive return," he said. "The market would say - if we believe in that, we will buy the stock - and the price would go up and the yield would come down.

"The fact that it has not done that suggests that maybe the market does not believe the dividend is actually sustainable." Shares in Goodman closed 15 per cent higher at 48? yesterday. The company faces challenges from volatile prices for its raw materials and pricing pressure from the large supermarket chains which sell its products, according to the head of equities at Morningstar, Andrew Doherty.

APN News & Media had a median yield forecast of 12.7 per cent, but was expected to cut dividends due to lower earnings, Mr Doherty said.

A divisional director at Macquarie Private Wealth, Martin Lakos, said defensive stocks usually paid bigger dividends and had lower earnings growth. But market jitters about the debt crisis had dragged prices down, leaving some sound companies with unusually high yields.

These high-yield shares were becoming more attractive, despite the higher risk associated with equities. Although the cash rate was 4.25 per cent, Mr Lakos said he expected it to fall to 3.75 per cent this year.

"Is an 8 per cent yield from a bank or Telstra a big enough return to compensate for the risk in the sharemarket, compared to a 3.75 per cent yield [cash rate]?" Mr Lakos said.

An RBS analyst, Alva DeVoy, noted corporate balance sheets were relatively under-levered, highly liquid, and had high levels of cash and near-cash holdings. "In our view, Ansell, Boart Longyear, Incitec Pivot, News Corporation and WorleyParsons have the potential to announce or increase buyback programs," she said in a note to clients.