United States entrepreneur and billionaire Mark Cuban allegedly once questioned the value of listed companies that do not pay out dividends to their investors. "I rarely think the market is right. I believe non-dividend stocks aren't much more than baseball cards. They are worth what you can convince someone to pay for it," he has been quoted as saying.
Although this is an extreme position to take, it does provide a good illustration of the love affair investors have with dividends. Not a single annual shareholder meeting goes by without somebody suggesting the dividend should be raised.
Dividends have been largely attractive because they allow investors to share in a company's profits immediately, rather than at some distant point in the future when a corporate event forces management to share the spoils with the actual owners of the company.
This cash-in-hand aspect of dividends has become increasingly more important as an income vehicle in the retirement phase. Extending the life of the average Australian through medical innovation is admirable, but it does provide the nation with some practical problems. To prevent people running out of money in the twilight of their lives, the idea of an investment that provides both income and capital growth to help make savings last longer has become more appealing.
The concept is not new and many income and high-yield equity strategies have been in existence for some time, but the launch of new funds has certainly accelerated in the past 12 months. Ankura Capital, PM Capital and Maxim Asset Management have launched income funds in the past few months.
Superannuation funds seem to be the prime candidates for these investments as an increasing part of their member base is moving to retirement, but so far the take up has been relatively low. Ankura Capital managing director Greg Vaughan, who launched an Australian equities-based high-yield strategy in May last year, says this is going to change.
"The top-end of town, the very large funds, they acknowledge that increasingly a part of their membership is now in post-retirement," Vaughan says.
"The investment strategy that you have in the accumulation phase is different than what you have in the retirement income phase."
He says there is a tendency to behave like an ostrich about the risk of running out of money in retirement. "It's very crudely looked at for retirees at the moment. It is almost to the point of surrender for retirees. The presumption is: let's just run your money down over 15 years; that is a long time off. But the reality is that when people hit retirement they have still got a long time to go and they really do need an income stream, and to do that without dipping into their capital, high-yield plays a really important part," he says.
"The attraction of high-yield equity investment is that the income stream generator can maintain its value in real terms, whilst if you take a long-term nominal bond, whilst it seems like a very good level of income today, eventually inflation hits it and in 10 to 15 years it is not doing what you want it to do."
Ankura's high-yield strategy has so far attracted about $100 million, but Vaughan expects this to grow.
"High yield is where over the next few years, large superannuation funds, in particular, will be focusing a lot of attention because they acknowledge that an increasing component of their membership is moving to those retirement years and they want investment options that suit their account-based pension and not that suited their accumulation up until retirement," he says.
