Sharemarket dividends or bank savings? There's no contest
So you're a self-funded retiree cursing the Reserve Bank for cutting interest rates.
Savers dependent on fixed interest have been poorly advised for decades, not just over the past year as interest rates have tumbled. The dividend flow from a boring portfolio of industrial stocks trounces fixed interest and whatever the best daily rate might be from the online banks.
And right now, even after the market has rallied to start the year, equity yields slaughter the best term deposit rates you could have grabbed last year. Of course the yields aren't as tasty as they were in January or as extremely tasty as they were a year or two ago, but they're still fine in the general scheme of things.
As a rough and simplified demonstration using five stocks (not a recommendation), the BusinessDay share tables show Telstra last closed with a yield of 5.6 per cent, NAB 5.5, Westpac 5.2, Wesfarmers 4.1 and Woolworths 3.7 - an average of 4.8 per cent. Add the franking credits and the effective pre-tax yield is more than 6.7 per cent. Who wants term deposits?
Those who think they're risk averse or scarred after confusing trading with investing will no doubt wail at this point about shares perhaps falling in price - but for someone after an income stream, the price isn't the point - it's the sustainability of dividends and their potential to grow. The price will take care of itself eventually and the capital appreciates over history.
The sure thing about term deposits is that the capital is being steadily devalued and that the return from the dividends on Australian industrial stocks rapidly outpaces the best that the banks can offer. That's the key message financial commentator Peter Thornhill has been making in presentations over the past couple of decades. I've heard his story before, during and after the GFC and it has added up every time.
The search for yield has been the market's main theme over the past year and it's not over yet. The analysts suggesting bank shares had reached a bubble high last week don't seem to realise that.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
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