'Reliable' equities not a replacement for bonds

'Reliable' equities not a replacement for bonds

Income-seeking investors should be wary of buying Australian equities despite their strong dividend payouts over recent years, says State Street Global Advisors (SSGA).


In a note to investors, SSGA said Australia’s equity market is one of the highest yielding in the developed world, and its “perceived reliability” could mistakenly cause some investors “to think of the market as almost bond-like”.

“This is a potentially dangerous misunderstanding: the capital value of an equity security is far more at risk than a bond, furthermore, unlike bond coupon payments, dividend payments are not fixed,” SSGA said.

The firm cautioned that data from the past five years shows that payout ratios in aggregate have climbed, while dividend yields held steady.

“This reflects a period during which resource companies and, to a lesser extent, banks held their dividends unchanged while experiencing a fall in earnings,” SSGA said.

For Australian market dividend yields to be maintained at the current level, SSGA warned, earnings need to improve since current payout ratios “cannot increase much further, and probably need to come down”.

“There is no guarantee that last year’s dividend payment will be repeated this year, or even that forecast dividends from sell-side analysts will be paid this year," SSGA said.

“A strategy of blindly buying companies with the highest reported dividend yield could expose investors to some high-risk securities."

SSGA added that while investing for dividends “may have long-term merit”, a different approach was needed by investors looking for short-term capital stability.

Read more:

European stimulus packages could backfire

Considered policy action needed: RBA

Super reforms face challenge from mixed Senate

New Australian head for Legg Mason

Global equities inflows the 'tip of the iceberg'

 

 

'Reliable' equities not a replacement for bonds
investordaily image
ID logo
promoted stories

Appointments

investordaily image

AMP names incoming chief risk officer

Jessica Yun

investordaily image

Antares Equities hires new director

Staff Reporter

Brad Fox

Former AFA CEO appointed to boutique board

Staff Reporter

Analysis

investordaily image

Warning lights flashing on Aussie equities

Roy Maslen

investordaily image

What’s in store for the economy in 2018?

Frank Uhlenbruch

ST Wong

Busting common passive investing myths

ST Wong