“Investors seeking yield will need to adjust their approaches”: Tyndall

At a time of record-low interest rates, chasing high-yield stocks has almost become a national pastime for income hungry investors, with the Australian share market providing attractive dividend yields and concentration of high-yielding sectors.

However, Malcolm Whitten, portfolio manager at Tyndall AM, says income-hungry investors may need to focus more on total shareholder returns to find better value, as quantitative easing and a lower interest rate environment comes to an end.

“The quantitative easing around the world has been a significant driver of global and Australian equities as investors sought higher-yielding stocks as a source of income in the face of low interest rates,” Mr Whitten said.

“But things are starting to change and investors seeking yield will need to adjust their approaches.

“While the focus lately has been primarily on the dividend yield from shares, investors can find better value and more investment opportunities by looking at the total shareholder return.

“For example, companies can increase returns to shareholders by increasing dividends, undertaking share buy-backs and successfully reinvesting in the business. Understanding a company’s future operating cashflow and capital expenditure plans are good ways to ascertain a company’s capacity to return money to shareholders,” he said.

“The strength of a company’s balance sheet, particularly gearing levels, as well as franking levels and pay-out ratios are important indicators of the sustainability of a company’s earnings and dividend stream.”

Mr Whitten added that, with interest rates very low, rate increases delayed and equities having staged a strong rally, it’s hard to see high expected returns in any asset class in the near term.

“However, while returns from equities may be lower than we have recently experienced, they should continue to provide investors with a reliable income source and the potential for some capital growth, as long as investors actively manage their portfolios.

“Actively managed portfolios are more dynamic as they allow investors to respond to changes in market circumstances, as well as helping reduce concentration risk.

“Traditional high-yielding stocks have been key drivers of the strong dividend growth, such as the banks which contributed 36% to all dividends paid in the 2013 financial year, up from 24% five years ago.

“However, at Tyndall all of our Australian share portfolios have reduced their weighting in banks as we feel that, after their incredible run, they are now overvalued.

“Furthermore, such a high contribution from one sector highlights concentration risk in the Australian share market.

“Investors beholden to hold the same stock weightings as the index are potentially exposing their portfolio to concentration risk.

“Within the four traditional high-yielding sectors in the Index (banks, telecommunication services, REITs and consumer staples), just eight ‘high-yielding’ stocks account for around 40% of the Index. The eight stocks are Commonwealth Bank, Westpac, ANZ, National Australia Bank, Telstra, Wesfarmers, Woolworths and Westfield Group.

“While these stocks have delivered marvellous returns and income to investors over the past 12 months, there is a risk that the current attraction of these high-yielding stocks will wane when quantitative easing comes to an end and bond yields rise.“The telecommunication services, gaming, banks and healthcare stocks are all sitting at the top-end of their long-term PE averages and are thus expensive compared to their historical average,” he said.

Mr Whitten said that three alternative income stock names to the banks are Woodside Petroleum, Woolworths and Wotif.com.

“All three stocks returned a significant amount of cash to investors in FY2013 via dividends. Woodside returned 43% of its cashflow to investors, Woolworths returned 46% and Wotif.com returned a very pleasing 84%.

“In addition, Woodside Petroleum and Woolworths continued to invest the remaining balance of their cashflow in their business (57% and 54% respectively) – to provide for future dividends to their shareholders,” Mr Whitten said.

Tyndall AM is an award-winning Australian investment manager, specialising in Australian shares, international shares, Australian fixed interest, international fixed interest and alternative assets.

As at 30 June 2013, Tyndall AM’s investment teams manage approximately A$23 billion in funds on behalf of retail and institutional investors, private clients, superannuation funds and charitable trusts.

Tyndall AM is owned by Nikko Asset Management Co., Ltd. (Nikko AM), a leading asset management company headquartered in Asia, with more than A$169 billion in funds under management (as at 30 June 2013).

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