February 2020

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. All eyes will be on interest rates in February although recent data suggests the Reserve Bank may hold off cutting rates further for the moment. 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.

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?

Quality counts

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.

i Canstart Highest term deposit rates

ii TRADING ECONOMICS Bonds

iii MarketIndex.com.au

iv Corelogic December 2019 Home Value Index

Tradies: How does your insurance measure up?

As a tradie, you are largely dependent on your physical ability to earn a living. So, what would happen if you fell ill or had an accident? Would you be able to continue your current lifestyle?

Most tradies work in a far more dangerous environment than any white-collared worker, so the chances of an accident are greater. A report by a major Australian insurer in 2017 showed that the occupations with the most insurance claims are carpenters and electricians.ⁱ

Cover for the self-employed

To make the topic of insurance even more critical for tradies, many are self-employed. So if you were unable to work, the impact would be even greater than if you worked for a major organisation.

With no sick pay, no other leave entitlements and possibly no workers compensation cover, an accident on the job can have a ripple effect. You and your family could be forced to dip into personal savings to cover medical and other bills at the same time as your business is not bringing in income.

If you are a sole trader, it’s also likely you won’t have workers compensation insurance which is paid by employers. Many employers expect contractors to provide their own insurance cover.ⁱⁱ

Even where you are covered by workers’ compensation, it usually only covers injuries sustained on the job or travelling due to work so it’s generally advisable to have income protection in place as well.

Replacing your income

Income protection insurance typically replaces up to 85 per cent of your income for a specified period.

This means you would have the money to pay your bills, your mortgage, your health care, the children’s education and general day-to-day living expenses.

Unfortunately, because tradies are more likely to make a claim than white collar workers, you do face higher premiums for income protection. For example, a survey by Insurance Watch estimated plumbers pay double the amount in premiums compared to accountants.ⁱⁱⁱ

Yet despite the cost, having adequate cover may well be worth it if you suffer an accident or an illness that prevents you from working for a time.

Fine tune your policy

One way to keep a lid on costs is to shop around and get the cover that most suits your individual needs.

For instance, how long would you want to wait before you started receiving insurance payments. Could you manage 90 days without a payment or is 14 or 30 days a better option? The shorter the waiting period, the higher the premium.

Another consideration is the length of time you would want to receive payouts. The longer the payment period, the higher the premium. Many policies offer cover for two to five years, but what if you are 30 and can no longer work? That’s a long time until you retire! There are policies, albeit more expensive, that will pay you until you turn 65.

It’s also important to check that you are covered for “own” occupation and not for “any” occupation under your policy.

If your policy stipulates “any” occupation, then you will not be able to make a claim if there are other occupations you can do, which may not pay as well as your current employment. If you have “own” occupation listed and you are a plumber, for example, then unless you can still work as a plumber you can make a claim.

Choose appropriate cover

Although it may be tempting to take out a cheaper accident and illness policies offered through general insurance, it could be a false economy. Such policies are not guaranteed renewable. Every year you’ll need to be reassessed, so it could prove a false economy if you developed a medical condition and couldn’t renew.

If you already have a pre-existing health condition, you could consider an income protection policy offering accident-only cover.

Income protection insurance is often dismissed as a luxury until you actually need it. You would not think twice about insuring your ute should something happen to it, so why think twice about insuring your ability to earn an income should something happen to you.

i Claims paid by OnePath in 2017

ii Trades Insurance workers compensation

iii Insurance Watch INCOME PROTECTION FOR “TRADIES”

Getting your balance back

Overindulge over the holiday period? You’re certainly not alone, but now it’s time to get back on track. Early in the year makes for the perfect time to dust yourself off and recommit to a your version of a balanced, healthy life.

Consider all aspects of your life

Before rushing ahead to create new goals and habits, take some time to consider all aspects of your life and what it looks like at present. This will help you work out how to achieve a better balance.

Are you working longer hours than you’d like to (and perhaps don’t need to)? How much sleep are you getting? Do you get time to see family and friends, and do you allow yourself to simply relax every now and then? Are you always rushing from place to place?

Reflecting on your life as is it will highlight what you want to change, making it clearer as to which habits you want to get rid of and which you want to cultivate.

Understand your habits

Once you’ve worked out which habits you want to break (perhaps it’s reading your emails as soon as you wake up or reaching for that block of chocolate every day come 3.00pm), have a think about why you do these things.

Don’t dismiss the power of neurotransmitters – enjoyable behaviour prompts the release of dopamine, which makes it difficult to break pleasure-based habits such as constantly checking your phone or reaching for another biscuit.ⁱ

It’s not impossible to break these habits though. Firstly become aware of your triggers, and then replace the habits that no longer serve you with better ones you can draw upon instead.

Create better habits

When deciding on what new habits you’d like to establish, it’s okay to think small. In fact, creating smaller habits that work towards a healthy lifestyle tend to be more sustainable.

Habits that will better balance your life may be a simple as going for a short walk every morning or switching off from technology at least an hour before bed – these actions can reduce stress levels and optimise your health.

While most health habits are established in childhood, it’s never too late to change.ⁱⁱ You might want to reach out for support to help you pinpoint what you’d like your new habits to be and how you can make them work. For instance, a personal trainer can help you focus on your exercise goals, a dietician on what you’re eating, or a business coach or mentor if you’d like to create better work habits.

Stick with it

Scientists have found that it takes an average of 66 days to form a new habit.ⁱⁱⁱ To help stick with your goal, remember why you are doing it – how will it make your life better and more balanced? Will it improve your health, make you happier and less stressed? Perhaps it will help you achieve a career goal or help you branch out into a new area of business. Reminding yourself about why it matters can help keep you on track.

Check-in on your progress to see how you’re tracking. This can also help you identify if you need additional support or to refocus your attention. You may also be pleasantly surprised at how far you have come!

Be kind to yourself

Sometimes in the quest for balance, we can become overly focused to the point of getting stressed if all the pieces aren’t fitting perfectly together. A balanced life should be a happy one, so be kind to yourself.

Remember that balance and a commitment to health and happiness is a lifelong commitment. It’s not something you can tick off your to-do list. Also, life happens and sometimes our best habits and intentions fall by the wayside as we have to shift focus to what needs our attention. Rather than getting frustrated, work on recommitting to a balanced life as best you can, when you can.

i Technology Networks – Your Brain Gets a Dopamine Hit From Information

ii ResearchGate – Healthy Habits in a Healthy Habitat: Fundamentals for a Healthy Life

iii National Center for Biotechnology Information – Making health habitual: the psychology of ‘habit-formation’ and general practice