Don Hamson

With official cash rates and bond yields plumbing all-time lows, investors of all types are increasingly looking for dividend payments as a replacement for regular income from term deposits and/or bonds.

While a decade ago, term deposits were generally producing higher returns than dividend income, falling cash rates mean dividends are now much higher, notes Plato Investment Management (Plato).

Don Hamson, Founder and Managing Director of Plato, warned investors to be wary of potential dividend traps, where yields appear to increase as underlying share prices weaken.

“Do not simply invest in the highest-yielding stocks,” he said today. “Consider how the share prices of some dividend paying stocks have performed over the past 12 to 18 months.  If the reason a stock is trading on a high yield is because its share price has collapsed, this is usually not a good sign, and could signal the stock is a dividend trap.  These are stocks that trade on high historic yields, but subsequently cut their dividends.”

Dr Hamson said investors should instead focus on stocks that provide both consistent dividend payouts and underlying capital growth, rather than one or the other. “Avoiding yield traps is key to income investing today,” he said. “We have refined our own active income investing process to attempt to avoid these.” 

Dr Hamson said it is timely for retirees, in particular, to reconsider their income generating asset mix. While the recent Reserve Bank of Australia rate cuts were beneficial to homeowners and people trying to buy a home, rate cuts also see Australian retirees receive less income from their floating rate income investment assets.

“Many income-related products, like income securities or bank hybrids are priced at a margin to bank bill rates, and have seen their income fall,” he said.

“Retirees living off cash-linked income will struggle to make ends meet. So, it is very timely for retirees to reconsider their income generating asset mix.  Thankfully, given the recent election result, retirees can continue to bank on receiving franking credits from Australian share investments.”

Dr Hamson notes that at a time when interest rates are hitting all-time lows in Australia, dividends paid by Australian companies have never been stronger. (The Plato Australian Shares Income Fund has distributed a record amount of dividends the past financial year with gross distributions including franking credits after fees of more than 16%.)

Plato is a leader in retirement income generation and highlights how active dividend investing can provide a regular income plus capital gain from the underlying share. Its listed investment company (LIC), PL8, is the only LIC to pay regular monthly dividends.

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