Russell urges investors to consider cash alternatives with new ETF
Global investment services firm Russell Investments is encouraging investors to think outside term deposits and cash and look for income alternatives such as high dividend paying shares which can boost returns, provide capital growth and be more tax effective.
Russell’s High Dividend Australian Shares ETF (RDV), launched in May 2010, has just completed its first financial year. Despite a difficult market environment, RDV was able to deliver on its goal of earning a higher dividend yield than the broad market, while still maintaining an element of capital growth. It returned 6.2%, with a 5.4% dividend yield, or 6.6% yield once grossed up for franking credits. The yield for the broad market over the same period was 4.3% – over 100 basis points below RDV.
“RDV’s performance shows investors don’t have to sacrifice their capital growth to get a good income return and this should be a reason to diversify out of term deposits or cash,” said Scott Bennett, portfolio manager at Russell Investments. “RDV provides an income return and selects stocks which offer other desirable qualities such as capital growth, so investors can have their cake and eat it too,” said Mr Bennett.
The ETF is based on a specially constructed index, the Russell Australia High Dividend Index, which comprises Australian blue-chip companies with a bias towards those that have a high expected dividend yield but also meet other characteristics including: a history of paying dividends; dividend growth and consistent earnings.
Diversification and tax considerations key
Russell says investors should not only diversify out of cash but also make sure their equity holdings are diversified to reduce stock specific risk.
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“Investors are increasingly using ETFs as an anchor to a direct equity portfolio as it helps them diversify across stocks, sectors and industries. They then complement this with their own favourite stock picks or managed funds,” said Mr Bennett.
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Investors should also consider how they can take advantage of tax benefits such as franking credits as part of their investment strategy. For example, in the case of ETFs like RDV, franking credits are passed onto the investor. Equity ETFs, like RDV, have naturally lower turnover and can qualify for tax breaks under the CGT discount rules, meaning any realised gains made after a year may be one-third or one-half tax-free to investors. This is further enhanced by the fact the money investors would have used to pay tax each year may stay invested, adding to the growth potential of the investment.
Australian dividends catch eye of overseas investors
High dividend paying Australian equities are becoming popular with international investors who are relying on dividends to fund their income needs as yields from cash instruments in other developed economies remain low.
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“The fact international investors are scouring the Australian market for dividends shows how competitive the yields are in our market,” said Mr Bennett.
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“As we head into the new financial year we want investors to be aware of alternatives to cash investments which provide solid income but don’t require you to forgo other benefits such as capital growth,” Mr Bennett concluded.
