The recent decision by the RBA to lower the cash rate .25 basis points has some investors re-evaluating their current income strategies. In the search for income, one of the most popular strategies is equity investing because of the regular payments of dividends, the possible tax benefit offered by franking credits, and low interest rates offered by traditional income sources such as cash deposits.
But the market volatility this year has some investors asking if it is still a worthwhile option for accessing income. The case for equity income investing in a low-rate environment can be made when you look at the potential for equities to provide attractive income returns compared to cash or bonds (average one-year term deposit have fallen from 6.1% Feb 2011 to 2.4% Feb 2016[1]) and offer a potential stable income stream for investors.
However, investors need to take into take into consideration the Australian market’s concentration when building their income portfolio and consider global equities to improve diversification. Previously, only available to institutional investors, global equity income strategies are now easily accessible using cost-effective ETF products as building blocks of an income portfolio.
Although international high yield investments do not carry franking credits, they offer access to attractive equity valuations in potentially unvalued markets and benefit from structural trends across the global economy, including growth in emerging markets.
Using an ETF like the SPDR S&P Global Dividend Fund (Ticker: WDIV), which tracks the S&P Global Dividends Aristocrats Index representing high yielding companies with a history of stable or increasing dividends, investors can build a diversified income or yield seeking portfolio. Additionally, through WDIV investors are able to access high-yielding sectors underrepresented in the local market including utilities, energy and healthcare.
Regardless of whether you look local or global for income, investors must balance the benefits of the strategy with potential risks, including the risk that companies may cease to issue dividends or reduce their payouts in difficult markets, as well as currency and political risks related to global investing.
