Despite the strength of the Australian economy and the excellent profit performance of Australian companies, our share market has stubbornly refused to improve. The constant flow of troubling overseas news has led to investor fatigue. While overseas ownership of Australian shares has risen, Australian investors remain on the sidelines. Yet the smart money here is seeking out high quality income-generating investments. Here are our recommendations.
Top five strategies
1. Look for income
Right now, there is good income available and investors should grab it. You just need to know where to look and how to manage your risk. It seems odd that investors are clamouring to invest in term deposits offered by Australian banks when they could get a much higher after-tax income by owning shares in the bank. At the current share prices, dividend income from owning the banks can provide over 10 per cent after allowing for the franking credit.
This is much higher than the term deposit rates available at the same banks, and with profits expected to grow, the income from investing in the major banks is likely to continue.
By focusing on high quality investments with low debt and solid yields funded entirely from free cash flow, investors can position themselves with sustainable income that can be relied on in good times and bad.
2. Keep your money safe
In times like these, it becomes critical to employ strategies that reduce risk to a level with which you are comfortable. Investment strategies should be designed around immediate and future cash flow needs.
In designing a strategy, we look at cash flow requirements and calculate the minimum amount that should be kept in a combination of cash accounts, term deposits or annuities offered by insurance companies with good credit ratings.
The rest of the portfolio can be invested to provide more income from other sources. Industrial shares should be favoured over resource shares for the higher income and greater franking they provide. And don’t ignore the opportunity to put reliable and growing income from property and infrastructure investments into your portfolio. If investing directly, don’t have more than five per cent of your portfolio in any one company, property or infrastructure investment. If investments perform well and move above these limits, take some profits and spread the money around.
3. Minimise your costs
If investment returns are likely to be subdued it becomes even more important to manage your costs. Also, it is important to keep your administrative costs as low as possible because they add little value to your portfolio. There are numerous ways that your portfolio can leak fees if you don’t have a full understanding of how you are being charged.
Ensure you are actually getting benefits from using the superannuation system rather than simply assuming you are. The superannuation system is more expensive than simply owning investments yourself and it can generate more costs than savings. Those with larger amounts in superannuation may be well served by a self-managed super fund to reduce the administration cost of running the fund.
4. Put money in its place
Money should be your servant, not your master. Reduce your costs, not your pleasure. Tax minimisation is particularly relevant after you turn 60 when you can draw a transition to retirement pension from super that is entirely tax free even if you are still working.
Other options to consider include using the age pension and commuting part of a defined benefit pension. Initiatives such as downsizing from the family home and part-time work options for those nearing retirement age are also worth considering.
5. Get good advice
There is more to being financially well organised than having money in super. Good advice is not just about what investments to buy and who should own them. Investment structures and investments are important, but so is making smart financial decisions about spending levels, major events and family situations.
