With interest rates at extremely low levels one of the major issues facing retirees is how best to generate enough income from their investments to meet living costs. Term deposit rates will soon have a ‘3’ in front of them so how can we invest and receive a reasonable yield.
The gross dividend yield for the share market has fallen to around 6.5% from 8% 6 months ago. Term deposit rates are now likely to fall under 4% and the long term bond rates are at all-time lows.
About 75% of companies are expected to at least maintain their dividends. Telstra offers a fully franked yield of 8% and has pledged to maintain its dividend for a further 2 years whilst the banks are also offering yields of around 7% per annum and continue to display strong earnings despite declining margins.
Investing in companies that pay high levels of dividends can be very rewarding financially but be careful of ‘The Yield Trap’. Yield traps are stocks that appear to have attractive dividends usually as a result of a recent significant fall in their share price however these same companies have a high risk of future dividend cuts.
Many mum and dad investors can fall into the trap of looking at the company’s yield only when deciding to invest without performing any other investigation into why the yield is so high. Often the significant reduction in price that has resulted in the high yield is due to the market reacting to underlying operating issues such as failing earnings or deteriorating cash flows. These often can impede the company’s ability to maintain their dividends.
Unlike a term deposit which only pays interest upon maturity (often once a year) retirees looking for regular income should consider some high yielding shares as part of a diversified portfolio to help smooth out their annual income. Dividends are paid in most months (excluding Jan, May, June and Nov) so having a diversified portfolio can help ensure income is paid throughout the year.
This results in a steadier income source helping budgeting and making sure that accessing capital is minimised.
It is currently extremely difficult to generate a reasonable yield within a portfolio making meeting living expenses tough in the current low interest rate environment. When blended with fixed interest investments such as bonds and term deposits the yield from shares can push up your overall yield on your portfolio to a suitable level minimising the need to redeem your own capital to meet living costs.
Knight Financial Advisors Pty Ltd is a Corporate Authorised Representative of Sentry Wealth Management Pty Ltd (AFSL 227 748) ABN 77 103 642 888. The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.