Financial advisors are engaged in a battle on behalf of their clients. It is a battle to generate enough income for a comfortable retirement.
That might seem strange given cost of living increases have been subdued over the last decade however, the collapse in the interest available on bank accounts or other “safe” investments, combined with cost increases in key areas like health and utilities, have forced advisors to look for other solutions for stable and sustainable income.
With the current economic environment characterised by low inflation, low growth and low interest rates, investors are looking to better diversify their income streams. For advisors this new reality presents both challenges and opportunities. As their clients look to build retirement income streams, advisors are moving away from low yielding cash and fixed income investments and this has significant consequences for risk management. But the move isn’t only away from defensive assets.
The past 12 months haven’t been so positive for some of Australia’s high income yielding stocks with the local market’s heavy reliance on resources and banks never been more apparent. As a result, the attitude of investors towards global equities has changed over the past 2-3 years as the breadth of opportunities for building income streams from offshore investments is realised.
Advisors are having to educate their clients about the benefits of supplementing their current income stream with global equities. This includes sectors that aren’t broadly available in Australia such as healthcare, utilities and staples. Exchange traded funds (ETFs) that follow income “rules” are one method advisors have been using to access these income opportunities offshore.
These rules are designed to increase portfolio yield while avoiding some common dividend traps. For example, the rules for the SPDR’s S&P Global Dividend Fund (WDIV) require each company to have had stable or consistent dividends over a ten year period. At the same time, stocks that have a yield above 10% are excluded – extreme yields at this level usually occur because of a sudden price collapse rather than strong profits or dividends.
Advisors are still seeing a home bias to local equities due to franking credits but there is definitely a place for global equities in an income portfolio. A global equity portfolio, such as the WDIV ETF, is able to generate surprisingly high yields without resorting to concentrated stock weights. Recent equity yields 5% pa have been achieved while holding 100 stocks – a significant boost on more traditional global equity portfolio yields of 2-3%.
The webinar was moderated by Michael Furey, Managing Director of Delta Research & Advisory, with guest presenter Lindsay Garnock, Director and Senior Financial Advisor with Boyce Financial Services alongside Jonathan Shead, Head of Portfolio Strategists, State Street Global Advisors Asia Pacific.
Source: State Street Global Advisors
