Shares inviting as fixed-interest rates fall

At the last interest rate review of the Official Cash Rate (OCR), the Reserve Bank Governor Dr Alan Bollard kept the rate at 2.5%.

He indicated there did not seem to be any great pressure to raise the rate. Given the outlook for core inflation and continued economic disruption stemming from the earthquakes, the current level of the OCR is likely to remain appropriate for some time.

This means the chance of the OCR rising is some months off and it may not even be until 2012.

What happens then will depend on inflation.

In the meantime, those with maturing fixed-interest investments are looking at reduced income as the reinvestment yield rates can be as much as 2% less.

It is possible to get yields (per annum) of up to 8% on unsecured bonds but the norm for those with ratings of A or better are about 5% for five-year terms. Six-month bank deposits are about 4% for amounts of $5000 or more.

Economies internationally are very similar where those with funds to invest are looking for satisfactory returns that are not available in fixed interest. Most countries' official cash rates are less that 1% per annum. This means that in terms of returns the share markets of the world are considered the place to be.

So far this year markets have increased by 9% for US (Standard and Poor's), Australia 13% and New Zealand 5%. They fell initially on the earthquake in Japan but have recovered almost all of the losses in the past few weeks. The recent coup in relation to Osama bin Laden has only enhanced market growth.

As commented before in these columns, the New Zealand sharemarket differs from most in the world in that it has a high dividend stream from many companies.

In particular, the listed property companies are now PIE where much of the dividend paid is excluded, such that it does not have to be returned for tax purposes. For example, the Argosy Property trust pays quarterly dividends on a yield of 8.8% for unit price of 80c.

There are other PIE in the New Zealand market such as Barramundi which invests in the smaller companies of the Australian market on a yield of 9.2% at 79c.

Company share yields from Hallensteins 7.75%, Vector 6%, The Warehouse 7.8% and Telecom 8.5% also have good dividend payments. On all these shares and listed PIE there is the opportunity to make capital gains as well. For example, six months ago the Argosy share price was 69c.

Similarly, Barramundi's price was 64c a year ago. Vector shares have risen by 18c (8%) over the past six months.

Large dividend payments are made from companies such as BHP, Westpac, ANZ and other banks but are expensive to buy.

Recently Westpac has set a dividend of 76c per share for the six-month period payable on July 4. You can still participate in this dividend if you buy Westpac shares before May 20, 2011. The price, however, is $A23.89 ( May 6) per share.

So if you are looking for income to supplement your bond and bank holdings, do consider the share market for a small portion of your portfolio. As always, the proportion invested in securities that fluctuate depends on the investors' personal risk they are prepared to take.

• Peter Smith is an authorised and certified financial planner and is the principal of Kepler Group Otago, Dunedin. Email: pete@keplergroup.co.nz. A disclosure statement is available on request and free of charge.