It’s February and the summer holidays are over for most Australians, but the bushfires and drought in eastern states are far from over. Our thoughts are with everyone affected.
January was unusually busy on the economic front. The International Monetary Fund downgraded its global growth forecasts to 3.3 per cent this year and 3.4 per cent in 2021, citing downside risks from geopolitical tensions and worsening relations between the US and its trading partners. And while the US Federal Reserve left interest rates unchanged in January, Fed chair Jerome Powell said: “Uncertainties about the outlook remain including those posed by the new coronavirus”.
In Australia, the economic impact of the summer bushfires and ongoing drought is also expected to be significant. The Reserve Bank held off cutting rates further for the moment as inflation lifted 0.7 per cent in the December quarter, taking the annual rate from 1.7 per cent to 1.8 per cent. Also, unemployment fell slightly from 5.2 per cent in November to 5.1 per cent in December. Both indicators fall short of the Reserve’s targets, but they are a positive sign.
Australian retail trade also improved in November, with a rise of 0.9 per cent the biggest in two years on the back of strong Black Friday online sales. However, consumer confidence remained weak over Christmas. The Westpac/Melbourne Institute survey of consumer sentiment fell 1.8% in January after a 1.9 per cent fall in December. This, along with the impact of the bushfires and drought, has hit business confidence, with the NAB business confidence index falling to six-year lows in December.
Learning from the littlies
Being called childish isn’t usually a compliment, however there are many things we can learn from children. Here are some important life lessons that they can teach us (or remind us of).
No dream is too big
Think back to the earliest memory you have of being asked what you’d like to be when you grow up. It’s likely your answer was a bit out of the ordinary – perhaps you even wanted to be a dinosaur or a princess! When kids answer this question, their imaginations run wild and they don’t stop to think of feasible career pathways to their goal. For them, no dream is too big (even ones not grounded in reality).
While being realistic is an important life skill, as we grow up we can lose the knack of dreaming big. We can talk ourselves down by thinking that our dreams aren’t possible or that they’ll take too much hard work to achieve.
Playing it safe and not challenging limiting beliefs can keep us in a place of dissatisfaction. So whether you want to climb the career ladder, try your hand at a new hobby or go off on an adventure, channel your inner-child – let yourself believe that these dreams are possible and start fearlessly working towards them.
Don’t be afraid to ask for help
Children are encouraged to ask questions and seek help from adults when they need it. You may have had no issues putting your hand up in class, but as an adult you’re hesitant to reach out for assistance.
Research paper ‘Why Didn’t You Just Ask?’ (published in the Journal of Experimental Social Psychology) explains that “even a minor request can invite rejection, expose inadequacies, and make a help-seeker feel shy, embarrassed, and self-conscious.”i
Perhaps you could do with career advice or need help with a more personal matter. Moving beyond a tentativeness to ask for assistance will help you feel more supported and capable, so ask away. Remember, all of us need a helping hand from time to time.
We’re not that different from each other
When you watch children interact, you’ll often notice how willing they are to make new friends and interact with each other. They might be poles apart in terms of their personalities and backgrounds, yet they tend to find common ground and band together to play.
Adult relationships tend to be more complicated. However, approaching people and situations with an open mind can bring you in contact with a diverse range of views and experiences.
Look beyond your differences and remember you all share the human experience. You may find yourself establishing great friendships and partnerships you otherwise would have missed out on.
It’s great to try new things
Kids are constantly exposed to new experiences as they grow and are generally pretty enthusiastic about trying something they haven’t done before. Yet as we grow older, we become more set in our ways and can be reticent to feel like a beginner again.
Trying new things is a fantastic way to challenge yourself and build your confidence. It can also help you recognise strengths you never knew you had and also pinpoint what you’d like to work on.
Don’t worry what others think
If you’ve heard the quote that begins with “You’ve gotta dance like there’s nobody watching …” (William W. Purkey), you’ll know that as adults it helps to be reminded its ok to let loose.
As our self-awareness and understanding of social conventions (where dancing in public can be looked upon as a tad eccentric!) grows, we can also lose the ability to block out other people’s opinions. Enjoying yourself without worrying about how you’re coming across is something kids excel at and adults can struggle with.
While you don’t have to take to tap dancing in the streets, simply letting yourself have fun and not being in ‘serious mode’ all the time can be very energising and uplifting. It’s a fantastic way to feel like a kid again!
So, channel and nurture your inner child – don’t be afraid to dream big and be open to new experiences and soon you’ll be viewing the world with the wonder and wide-eyed enthusiasm of a child.
The hunt for dividend income in 2020
With interest rates at historic lows and likely to stay that way for some time, retirees and other investors who depend on income from their investments are on the lookout for a decent yield.
Income from all the usual sources, such as term deposits and other fixed interest investments, have slowed to trickle. Which is why many investors are turning to Australian shares for their reliable dividend income and relatively high dividend yields.
The average dividend yield on Australian shares was 5 per cent in 2019 and more than that for many popular stocks.
By comparison, returns from traditional income investments are failing to keep pace with Australia’s low inflation rate of 1.7 per cent. Interest rates on term deposit from the big four banks are generally below 1.4 per centi, while the yield on Australian Government 10-year bonds is around 1.2 per centii.
But with shares entailing more risk than term deposits or bonds, is a dividend income strategy safe?
Dividends provide stability
When comparing investments, it’s important to look at total returns. The total return from shares comes from a combination of capital gains (from share price growth) and dividend income. While market commentary tends to focus on short-term price fluctuations driven largely by investor sentiment, dividend income is remarkably stable.
Over the past 20 years, dividend income has added around 4 per cent on average to the total return from Australian shares.
For example, in 2019 the All Ords Index (which measures the share price gains or losses of Australia’s top 500 listed companies) rose 19.1 per cent. When dividends were added, the total return was 24.1 per cent.
So how are dividend yields calculated?
Calculating dividend yields
To work out the dividend yield on a company’s shares you divide the latest annual dividend payments by the current share price.
Take the example of BHP Billiton. Its shares were trading at $37.41 in December after paying annual dividends of $1.9178, providing a dividend yield of 5.13 per cent ($1.9178 divided by $37.41). When you add franking credits, the ‘grossed up’ dividend yield is 7.32 per cent.iii
Franking credits are a type of tax credit compensating shareholders for tax the company has already paid. Companies such as BHP with fully franked shares will have franking credits equal to 30 per cent of the gross dividend value. This is not a recommendation for BHP, simply an illustration of how dividend yields are calculated.
But a big dividend yield is not always better. A high dividend yield may signal a company with limited growth prospects, a falling share price, or both. Sometimes it’s the result of a one-off special dividend.
So how can you spot a quality dividend?
Investors looking for a reliable income stream need to focus on companies with quality assets and strong management teams, good growth prospects and sustainable earnings. This is what will determine the future growth in dividends and/or the share price.
In the current low interest rate, low economic growth and low inflation environment, many companies have taken a cautious approach and rewarded shareholders with higher dividends. As growth picks up, companies may allocate a greater share of profits to growing their business.
Relying too heavily on dividends from Australian shares could also expose you to risk or mean missing out on opportunities elsewhere.
Consider the big picture
When hunting for a good dividend yield, it’s important to follow fundamental investment principles. That means holding shares from a variety of market sectors, with good prospects for growth and income.
Diversification is also important across asset classes. The total return from Australian residential investment property was 6.3 per cent in 2019 (from a combination of price movements and rental yields), but in other years the performance of shares and property could be reversed.iv
And despite their lowly returns, holding term deposits with different maturity dates allows you to manage your cash flow. It also helps avoid having to sell your shares and crystallise losses in a market downturn.
If you would like to discuss your income needs within the context of your overall investment portfolio, give us a call.
2019 Year in Review: A year of highs and lows
It was a year of extremes, with shares hitting record highs and interest rates at historic lows. Yet all in all, 2019 delivered far better returns than Australian investors dared hope for at the start of the year.
The total return from Australian shares (prices and dividend income) was 24 per cent in the year to December.i When you add in positive returns from bonds and a rebound in residential property, Australians with a diversified investment portfolio had plenty to smile about.
Humming along in the background, Australia entered a record-breaking 29th year of economic expansion although growth tapered off as global pressures mounted.
Global economy slowing
The US-China trade war, the Brexit impasse and geopolitical tensions weighed on the global economy in 2019. Yet late in the year optimism grew that US President Donald Trump would sign the first phase of a trade deal with Beijing. The re-election of Boris Johnson’s Conservatives in the UK also raised hopes that the Brexit saga may finally be resolved.
The US economy is in good shape, growing at an annual rate of 2.1 per cent. China has fared worse from the trade tensions, with annual growth of 6 per cent its weakest since 1992. In Australia, growth slipped to an annual rate of 1.7 per cent in the September quarter.ii
Despite the global slowdown, Australia continued its run of healthy trade surpluses thanks largely to a 29 per cent increase in iron ore prices.iii
Interest rates at new lows
The Reserve Bank cut the cash rate three times in 2019 to an historic low of 0.75 per cent. The US Federal Reserve also cut rates to a target range of 1.50-1.75 per cent. This was the main reason the Australian dollar lifted from its decade low of US67c in October to finish the year where it started, around US70c.iv
Rate cuts flowed through to yields on Australian 10-year government bonds which fell to just 1.37 per cent.v Total returns from government bonds (yields plus prices) were up by around 8 per cent.vi
Retirees and others who rely on income from bank term deposits had another difficult year, with interest rates generally below 2 per cent. After inflation, the real return was close to zero. It’s little wonder many looked elsewhere for a better return on their money.
Bumper year for shares
The hunt for yield was one reason Australian shares jumped 18.4 per cent in 2019, the best performance in a decade.vii The market climbed a wall of worries to hit a record high in November on optimism about a US-China trade deal, then eased back on concerns about slowing economic growth.
Despite low interest rates and personal tax cuts, consumers are reluctant to spend. The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.1 in December – anything below 100 denotes pessimism.viii
Property prices recovering
Australian residential property prices rebounded strongly in the second half of 2019, driven by lower mortgage interest rates, a relaxation of bank lending practices and renewed certainty around the taxation of investment property following the May federal election.
According to CoreLogic, property prices rose 2.3 per cent on average, led by Melbourne and Sydney, both up 5.3 per cent. When rental income is included, the total return from residential property was 6.3 per cent.ix
Property prices are expected to recover further this year but with shares looking fully valued and bond yields near rock bottom, returns could be more modest.
The Australian government is under pressure to do more to stimulate the economy in the short term to head off further rate cuts by the Reserve Bank. More fiscal stimulus could inject fresh life into the local economy and financial markets.
Overseas, the US-China trade war is far from resolved and could remain up in the air until after the US Presidential election in November. There is also uncertainty over the Brexit deal and its impact on trade across Europe.
The one thing we do know is that a diversified investment portfolio is the best way to navigate unpredictable markets.
If you would like to speak to us about your overall investment strategy, give us a call.
i Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019
ii Trading Economics, viewed 1 Jan 2020, https://tradingeconomics.com/indicators
iv Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/currencies
vi Economic Insights: Year in Review; Year in Preview, CommSec 2 January 2020.
vii Trading economics, viewed 1 January 2020 https://tradingeconomics.com/stocks
Retirement Planning Partners Pty Ltd is a Corporate Authorised Representative of Madison Financial Group Pty Ltd Australian Financial Services Licence No. 246679. This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.