Three defensive diversified highyield investments for your portfolio

Post on: 21 Май, 2015 No Comment

Diversified. exchange-traded products are bought and sold like shares on an exchange, have low fees and provide diversified exposure by replicating an index based on dozens of stocks. Photo: Eddie Jim

KEY POINTS

Thebiglisted investment companiesremain one of the simplest ways for conservative investors to gain diversified equities exposure
Several strategy-focused exchange-traded products have been launched in recent years to provide investors with index-like exposure to higher-yielding stocks
Conservativeinvestors who seek higher returns from shares should consider a portfolio approach rather than buying a few stocks directly.

Technology stocks, commodities and emerging markets are usually the stuff of investment bubbles, not high-yielding blue chip shares. But after strong gains in 2012, a bubble of sorts is developing for prominent income stocks.

Twelve months ago [early 2012] there were some very good yield ideas for share investors, says RBS Morgans adviser Ken Howard. There are not nearly as many defensive yield stocks available now at attractive prices, given the rally over the past year.

The danger now is in buying income stocks at elevated levels and using their yield as a surrogate for bank term deposit returns. because of the higher volatility of equities and the potential for capital loss.

Any investor who thinks they can just jump straight from cash to high-yielding stocks without taking on extra risk is living in false hope, says BetaShares head of portfolio construction Tony Rumble.

Theres nothing wrong with adding income stocks to the equities component of your portfolio if you think the yields will support higher returns. The problem is when investors use these stocks to produce the same or better yields than cash and arent aware of the equity risk added to their portfolio.

A better strategy for conservative investors is to find investments that provide higher returns than term deposits, and have less risk than holding a handful of shares directly.

Such strategies are readily available if you know where to look. In January 2013, we asked market experts to nominate their best sleep-easy investments strategy for risk-averse investors who are content with single-digit returns.

These sleep-easy investments are particularly useful for investors who sold shares during the global financial crisis, reinvested in term deposits and must now take greater risks to produce decent returns but are concerned about leaping from cash investments into income stocks in a volatile sharemarket.

It is not an easy decision.

A 1.75 percentage point cut in the official cash rate since October 2011 has helped push the maximum term deposit rate down to 5 per cent (for a year), according to Infochoice.com.au. At the start of 2012, investors could get up to 6.1 per cent on a term deposit an attractive return given weakening share and property prices.

With financial markets pricing in another quarter to half a percentage point cut in the official cash rate this year possibly up to a full percentage point, on some economists forecasts term deposit rates have further to fall.

Earning $40,000 on a $1million term deposit will seem frightfully low, and those who lock deposits away for three to five years to get a slightly higher rate face the prospect of low returns and potentially higher inflation eroding purchasing power.

As the cash rate falls, expect a stronger move into high-yielding blue chips a trend that is already entrenched, with several bank stocks, Telstra, utilities and A-REITs outperforming the sharemarket.

Although they were a winning strategy last year, income stocks do not suit all investors.

For one thing, valuation risks have risen for the most popular ones.

Also, some will argue this is no time to buy sleep-easy assets, given the sharemarkets rally in 2012-13. That said, the following ideas show solid single-digit returns can be achieved with far less risk than picking a handful of popular high-yielding stocks.

Listed investment companies

ThebigLICsremain one of the simplest ways for conservative investors to gain diversified equities exposure.

The Australian Foundation Investment Company delivered a 31 per cent one-year total shareholder return in 2012, Argo Investments returned 28 per cent and Milton posted 29 per cent.

Those returns are unlikely to continue in 2013. The three LICs traded at unusually large discounts to their net tangible assets (NTA) a year ago as the LIC sector lost favour. Each now trades at a slight discount or parity to NTA after share price gains in the past year and renewed interest in LICs.

Unlike exchange-traded funds, which aim to replicate an index, the big LICs provide moderate active exposure to Australian shares. They are well suited to conservative investors who want exposure to blue-chip shares, reasonable fully franked yield and low ongoing management fees. Although likely to suffer if the sharemarket falls, the largest LICs have good long-term records.

Exchange-traded products

Several strategy-focused ETPs have been launched in recent years to provide investors with index-like exposure to higher-yielding stocks. They include the Russell High Dividend Australian Shares ETF, Vanguard Australian Shares High Yield ETF, iShares S&P/ASX High Dividend ETF, and the SPDR MSCI Australia Select High Dividend Yield Fund.

Like all ETPs, the yield ones are bought and sold like shares on an exchange, have low fees and provide diversified exposure by replicating an index based on dozens of stocks. Differing index methodologies mean the yield ETPs can include quite different stocks. Some have more exposure to mid-cap growth stocks, which might not suit conservative investors.

ETPs should appeal to investors who like the idea of gaining yield from a basket of stocks, rather than holding a few income shares directly, and who are willing to take some equity risk if the market falls.

Defensive yield stock portfolios

Conservativeinvestors who seek higher returns from shares should consider a portfolio approach rather than buying a few stocks directly.

RBS Morgans Ken Howard says investors should focus more on the sustainability of the dividend rather than the headline yield.

In this market, you should be willing to sacrifice some yield if it means holding a high-quality company that has greater dividend certainty, he says. Woolworths is a good example; a fully franked yield just above 4 per cent is less than many defensive yield stocks provide. Yet it is one of the countrys best-quality companies and has a good long-term record of lifting its dividend.

A-REITS have also become more popular with income investors. Listed property trusts substantially outperformed the broader sharemarket in 2012, with investors attracted to the sectors high yield and willing to forgive its past sins notably excessive debt and risk taking.