The hunt for yield – banks or A-REITs?

The predicted interest rate cut tomorrow is likely to push some more investor money into the market, with banks remaining attractive and property trusts falling out of favour.

Investors will again be looking for places to put their money to earn a better return than paltry at-call rates offered by the banks with the likelihood of a rate cut tomorrow a near certainty.

High dividend yielding shares will continue to have the interest of yield-hungry investors.

The past 12 months has seen the big four banks rise in price and popularity with investors for the dividend yield on offer. Not so long ago they offered a 10% yield, including franking credits, but this has been whittled down to around 7% as share prices have climbed.

Share price appreciation returns are mixed, depending on which bank has your interest. At the low end, is National Australia Bank (NAB) returning 24% in contrast with leader Westpac Banking Corporation (WBA), tacking on 35% (see John Abernethy's Bank stocks a hold strategy).

So in simple terms the total return, which includes share price appreciation and dividends, you have received is over 30% in a worst-case scenario.

There has been talk our local banks are overvalued, and that very well may be the case. However, as long as they can provide investors with a steady income stream they will continue to be in favour with the market. (Especially with self managed super fund investors who collect the dividends in the more favourable tax environment.)

The proposed deposit levy will potentially hurt depositors in lower rates offered, but the overall hit to the bottom line shouldn’t impact bank profits to the extent dividends need to be reduced from current levels. Prior to the levy announcement last week, analysts were still forecasting increasing earnings per share.

With investors chasing the income offered from banks combined with the perceived level of investment safety, we have seen a shift away from the once preferred real estate investment trusts as a means of achieving a constant income stream.

This is a reflection of the miserable returns offered around their collapse at the end of 2007 and was matched with reduced dividends as a result of lower earnings per share. While the yield hovered around similar levels of 6%, the sector had lost over 70% of its value meaning investors were only receiving the prevailing yield on current market prices, not the pre-crash levels.

The problem with this is the significant difference between 6% when the sector was at a peak and 6% when the sector was at its low. The dollar value of income was materially impacted.

The REIT sector currently proposes an interesting dichotomy between risk and reward. Economically, things are set to be tough locally for the foreseeable future with unemployment tipped to rise and the effect of the lower currency yet to work its way through the economy, possibly proposing headwinds for the sector (see David Gilmour's A-REITs find favour – but what about those vacancies rates?).

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