Investing for Income (part 2) | BetaShares

Investing for Income (part 2)

BY Richard Montgomery | 4 September 2019

Reading time: 5 minutes

Earlier this month, in Investing for income (Part 1), we looked at the challenges facing investors seeking income in a low interest rate world, and presented several opportunities in the cash and fixed income asset class.

In Part 2, we explore the opportunities to earn income from equities. Australian investors are used to a healthy dividend yield from investments in domestic equities, but these are not the only equities-based income-producing opportunities available.

First up, we’ll look at a global equities fund that offers the potential for both income and growth.

Income from global equities

International equities are not typically the first place Australian investors turn to when seeking income, given that the dividend yields they offer are typically significantly lower than those available on Australian shares. The benchmark MSCI World Index, for example, had a yield of 2.5% p.a. as of 31 July 2019.

However, within the universe of available global stocks there are companies paying significantly higher dividends than the MSCI Index yield.

BetaShares’ Global Income Leaders ETF (ASX: INCM) aims to track an index that invests in 100 large and mid-cap developed world companies screened for attractive and persistent dividends. It then ranks eligible companies by dividend yield. The result is a diversified portfolio of 100 global companies that seeks to pay attractive, quarterly income. As of 31 July 2019, INCM’s index had a 12-month dividend yield of 4.7% (net of withholding tax).

Dividend yield: INCM vs MSCI World

Source: Bloomberg. Graph shows performance of INCM’s Index (the Nasdaq Global Income Leaders Index), not ETF performance and does not take into account ETF management costs. You cannot invest directly in an index. Past performance is not an indicator of future performance of Index or ETF. Yield will vary and may be lower at time of investment. INCM’s Index yield shown gross and net of withholding tax (i.e. shown from the perspective of an Australian tax payer), and MSCI World Index yield shown gross of witholding tax.

INCM offers not just opportunity for attractive income, but also potential for some defensive tendencies – INCM’s Index has a track record of lower drawdowns during periods of market falls compared to the MSCI World Index.

Income from real assets

Another option for yield-seeking investors is exposure to ‘real assets’.

Real assets include assets such as listed property, utilities and infrastructure, including toll roads, airports and electricity grids. They typically have long-term, built-in contracts that allow revenue to be increased in line with, or above, the inflation rate, and therefore provide relative cash flow predictability and stability of dividends. Historically, assets like these have performed well in falling interest rate environments.

The BetaShares Legg Mason Real Income Fund (managed fund) (ASX: RINC) invests in a portfolio of ASX-listed real assets. RINC aims to generate a pre-tax yield higher than that of the S&P/ASX 200 Index, and to increase that income above the rate of inflation.

While RINC was only launched in February 2018, it is based on the strategy of the unlisted Legg Mason Martin Currie Real Income Fund, which since inception in 2010 has consistently grown its income stream. As the chart below shows, the unlisted fund’s dividend yield has historically been significantly higher than that of the S&P/ASX 200 Accumulation Index. Total returns have exceeded returns from a blend of the S&P/ASX 300 A-REIT Index and the S&P/ASX Infrastructure Index, with lower volatility, from inception in 2010 to 31 July 2019.

The Legg Mason Martin Currie Real Income Fund was recently awarded Mercer’s best-performing Australian equities fund strategy over the year to 30 June 2019, returning 17.4% over the year1.

Legg Mason Martin Currie Real Income Fund

*Past performance is not a guide to future returns. Source: Martin Currie Australia as at 31 July 2019. Data calculated for the representative Martin Currie Australia Real Income account A$ net of management fees. Periods over a year are annualised. Inception Date: 1 December 2010. This strategy is not constrained by a benchmark, however for comparison purposes, it is shown against the S&P/ASX 200 Accumulation Index and the blended 50% A-REIT 300 Index / 50% S&P/ASX Infrastructure Index. Indicative only, actual portfolio may differ. As the BetaShares Legg Mason Real Income Fund (managed fund) ASX: RINC commenced in February 2018, this information is based on the unlisted Legg Mason Martin Currie Real Income Fund, a comparable fund managed by Martin Currie Australia using the same strategy to illustrate how the strategy has performed over a long time period.

For a more detailed discussion of RINC, please refer to today’s article Getting Real in the Hunt for Yield.

Enhanced dividend strategy

Our third option is the BetaShares Australian Dividend Harvester Fund (managed fund) (ASX: HVST), which was designed specifically with SMSFs and retiree investors in mind.

The fund aims to generate franked income that is at least 1.5x the income yield of the broad Australian sharemarket.

The stocks in the fund are generally selected from the top 50 ASX stocks, and screened for high income, based on expected future dividends. The methodology involves holding around 18 stocks that are due to go ex-dividend in the near future. Approximately every two months, the portfolio is rebalanced, with funds allocated to stocks that are expected to produce the highest yield within the next rebalance period. This ‘dividend harvesting’ strategy maximises exposure to dividend-paying shares. The Fund will also hold an allocation to one or more broad Australian sharemarket ETFs in order to increase security diversification and reduce single stock exposure.

The fund pays distributions to investors on a monthly basis.

HVST also employs a risk management strategy that aims for reduced drawdowns during sustained market declines, and lower portfolio volatility.

Watch out in next week’s Insights for an article covering HVST in detail.

1. Past performance is not an indicator of future performance.

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