“I think it has been part of this insatiable global appetite for yield, which has seen a lot of foreign money on our shores … and has made it all very self-fulfilling,” David Pace, portfolio manager at Greencape Capital told last week’s Morningstar Investment Conference.
The fear is that this shareholder demand for yield is pushing companies away from investing opportunities.
“Are these guys sacrificing growth to increase their payout ratio today? … I would hate to wake up in three years’ time only to see an asset earnings hole in the Australian markets,” Mr Pace said.
Fidelity also believes sustainable yield is particularly important in less bullish market conditions.
“Within a lower growth framework … yield and growth are both rare assets,” Paul Taylor head of Australian Equities, Fidelity Worldwide Investments said.
He adds that sustainable yield is a “very important discipline for a company and the market in general”.
However, Fidelity warns that this does not mean all high yielding stocks are bad.
Referring particularly to the mining sector, Mr Taylor calls on them to give money “back in dividends”, and advises them to come back to the market if they “have got a great investment opportunity”.
Essentially, investors must search for those sustainable stocks, both in earning and yielding potential.
Mr Pace advised picking what he terms “growth at the right yielding stocks”, that is stocks that are investing correctly and not just giving capital back at the expense of future earnings.
He added that the additional benefits of these stocks are they “are delivering growth by micro-managed outcomes … [and] not relying on system growth for improvement”.
