Investors requiring income, and particularly those on NZ Superannuation requiring a top-up, are having difficulty in finding a satisfactory investment.
In my column two weeks ago, I discussed investing in bonds, which can be a disadvantage if the investment is too long (five years-plus).
The risk is that in the period the bond is held, interest rates may rise considerably, such that a sale will result in a capital loss.
The majority of personal investors normally hold a bond to maturity, as the income stream is usually assured at a fixed rate for the term of the bond.
Many investors are now very wary of finance companies, even though there are seven providers with an extended government guarantee to December 31, 2011.
The power of cash in the bank to compound is well known, but true growth is not achieved.
The official cash rate (OCR) looks likely to be held at 3% until at least mid-2011.
Investors are opting for short-term views, expecting rates to rise when the OCR rises.
In the long run, while there is little volatility, bank interest does not out-perform the combined growth of share prices and dividend re-investment.
Excellent income can be received from shares.
The New Zealand sharemarket is quite different from many overseas markets in that NZ companies give a priority to returning profits to their shareholders.
The dividends paid by many companies in NZ give a yield higher than funds in the bank. There is also the possibility of getting some growth from the share price.
Even if the NZ sharemarket is likely to reduce as interest rates rise, several companies will continue to pay satisfactory dividends.
You can buy shares directly yourself for income.
For example, based on closing share prices last Thursday, the dividend yield of Telecom was 9.8%, Hallensteins 5.6%, Sky City 5.4%, Warehouse 7.9% and Barramundi 8.6% for the past year.
In the listed property sector, yields from Argosy Property Trust at 9.25% and Kiwi Income Property at 7.2% are also satisfactory. (Dividend-yield figures from Direct Broking Limited website).
In addition, these shares and listed property funds could have made capital gains over the past year.
However, in the examples I have chosen for income purposes only, Hallensteins' growth of 40% and Barramundi's of 12% are significant.
Telecom is the worst performer in terms of share price, with a 17% decline.
However, these are only a small sample of what is available.
Also, listed property funds and listed managed funds such as Barramundi now pay a portion of their income dividend as exclude dividends (read "tax free"), as they are portfolio investment entities (PIE).
As investors are well aware, past performance is not a true guide to future returns.
The use of equity for income should be regarded as a long-term investment, due to the volatility of the capital during the time of investment.
While the returns are obviously very satisfactory (as above), they are not for the faint-hearted.
You have to manage your risk by the amount you expose to sharemarket volatility.
Peter Smith is a certified financial planner and is the principal of Peter Smith Financial Services Ltd, Dunedin. Email: finance@petersmith.co.nz A disclosure statement is available on request and free of charge.
