Investment Ideas

Income Investing

Chasing Income with Equities

As our life expectancy extends, investing for income is becoming increasingly important. However, returns from traditional income sources such as cash and term deposits have been low – the average one-year term deposit rate has dropped significantly over the past ten years, from 3.20% p.a. at end June 2009 to 0.60% p.a. at end June 20191. As a result, the higher income offered by equities has made equity income strategies more attractive.

We believe well designed equity income strategies provide attractive long-term options for investors looking for sustainable income streams through regular dividend payments.

An equity income strategy has the potential to:

  • Enhance income. An equity income strategy offers you the opportunity to boost your income return. The current yield of the S&P/ASX 200® index, of 4.0%, exceeds the prevailing average one-year term deposit rate of 0.60%2.
  • Provide exposure to equity growth. Globally or domestically, high quality equity income strategies that focus on companies that have a consistent record of growing dividends have offered the opportunity to participate in market upswings, while continuing to provide income in turbulent times.

Is it Time to Diversify Offshore?

It can be difficult for Australian investors to create a truly diversified, yield-oriented equity portfolio within the confines of the local market. The Australian equity market is heavily weighted towards just a few sectors — primarily materials and financials. Together, these two sectors make up half of the Australian market by value, compared to less than 20% of global markets outside Australia.We believe investing in global equities can help you build a more diversified equity income portfolio. 

Here are some key reasons why you should consider going global: 

  1. A bigger opportunity set. The Australian equity market represents less than 2.5% of the global stock market capitalisation.4 By opening up to a global opportunity set, you can gain exposure to some ofthe world’s more stable and profitable companies, sectors which are not well represented in Australia, and economies which may rise and fall at different times to the local economy.
  2. Improve diversification. A large proportion of dividends in Australia are contributed by a handful of Australian companies. In a global dividend fund more companies contribute, which could help reduce the impact of market volatility or a local economic downturn.
  3. Capture growth. Well-designed high yield equity investments can also capture share price growth. 

By selecting a global income exchange traded fund (ETF), you can tap into the income-generating potential of some of the world’s more stable and profitable companies, while achieving more effective diversification.

A global income ETF creates a reliable and diversified income stream through a single investment, and there is less need for you to research, select, monitor and trade shares across unfamiliar sectors and markets. 



Needle in a Haystack: Selecting a Smart Beta Strategy in an Overcrowded Landscape

Interest in smart beta is growing – at the end of December 2018, there were 1,493 smart beta equity ETFs and ETPs globally. Within such a crowded landscape, investors need to conduct ample due diligence before selecting a strategy. This worksheet provides a thorough framework to consider when choosing the most suitable smart beta ETFs.

Source: Reserve Bank of Australia, as of 30 June

Source: S&P /ASX 200, Factset. Reserve Bank of Australia, as of 30 June 2019. Series: FRDIRSAO10K, Retail Deposit and investment rates, Online Savings accounts

Weight of Materials and Financials in the MSCI World ex Australia Index. Source: Factset, as at 30 June 2019

4 Weight of Australia in the MSCI World Index was 2.41%. Source: Factset, as of 30 June 2019.