Reaching For Higher Yield

Investing for total return, not just dividends, is the way forward for retirees

- Vita Palestrant

It’s a quandary every retiree faces: how to get a higher yield without taking on too much risk. Interest rates are in the doldrums and unlikely to budge any time soon while some of the share market's darlings, like Telstra, attractive for its dividend income, have faltered.

Jonathan Philpot, a partner at HLB Mann Judd wealth management, says picking stocks on dividends alone is risky. “If future earnings are going to go backwards, dividends will always follow that fall in earnings. It’s most important you buy stocks with earnings still growing.”

Telstra is a classic example, he says. “Their earnings are going to decline 20–30% over the next few years. That means dividends will be declining as well. They’ve been quite upfront about it. Dividends have already been cut this year and will be cut further next year.”

While many retirees got burnt during the GFC, Philpot says Australian shares are still the best place to look for a stable income return.

“Many people sold out near the bottom of the market in 2009 and 2010, and went into fixed interest investments. At the time, they got very good yields and thought it was great: they had a secure investment, the government guarantee and a return of 7–8%. But interest rates have more than halved since then and they’ve experienced a massive loss of income.

“The share market back then was yielding about 4%, and it’s still yielding about 4%, so if they had stayed the course and had a diversified portfolio with a good portion of it in Australian shares, their income levels would have been far more consistent over this period,” he says.