WITH interest rates on bank deposits at all-time lows investors needing income have a battle on their hands. For conservative investors finding a solution requires effort to learn about options most haven’t considered before.
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For example many Australian shares pay dividends at two to three times the rates available on bank deposits. Many good quality shares pay four to six per cent dividends and provide tax credits refundable in cash from the ATO worth an extra two to 2.5 per cent.
Examples include Telstra, most banks, Insurance Australia Group, Wesfarmers, CSR, Harvey Norman, AMP, Perpetual, AGL and QBE Insurance.
Certainly shares fluctuate in value. This can be managed to some extent by buying shares in a wide range of companies.
For long-term investors the uncertain future values can be a good thing rather than a bad one. The capital value will usually grow over the long term. As the value increases the income will also grow.
Managed funds invest in a broad portfolio of shares in thirty to fifty different companies. A good example is Perpetual’s Industrial Share Fund, which launched in 1966.
Perpetual have prepared figures showing the income earned on $100,000 invested in bank term deposits versus $100,000 in the fund.
A person who invested $100,000 in bank term deposits 20 years ago in 1996 earned about $6,500 interest in year one. If they put $100,000 in the perpetual fund they only earned $4,200 in dividends. However they also received refundable tax credits of $2,400 for total income of about $6,600.
Today the $100,000 in term deposits is earning less than $3,000 interest per annum. If we adjust that for inflation over the period the real purchasing power is now only $2,000.
In fact the inflation depreciated value of the $100,000 term deposit is now only about $60,000.
The person who invested $100,000 in the fund received $10,000 in dividends last year plus $4,000 of tax credits for $14,000 total income. Those figures are adjusted down for inflation in the same way. The $100,000 invested is now worth around $290,000 inflation adjusted.
The fund is worth nearly five times more but the key point is not so much about the growth in the value. It is more about the increase in the annual dividend income over the years as the investment has grown.
After 20 years the fund is paying seven times the income of the term deposit.
Of course past performance is not a guide to future performance, and this is not a recommendation to invest in the fund but an illustration of the benefits of buying shares for income.
