Investing Beyond the Mainstream: Equity Income

Australian Financial Review, October 2016

It’s a hard time to make a buck. You can’t make a decent return sitting in cash anymore; bonds are delivering historically low rewards, and in much of the world now generate a negative yield for the first time in living memory; and the outlook for stocks is uncertain.

But diversifying from the mainstream is challenging, and for most of us requires professional assistance. In this series we will look at four interesting asset classes, and ask financial planners which fund managers they trust with their clients’ money, and why.

We start with equity income, also known as yield stocks: an equity portfolio, but one selected chiefly for the dividend income it generates. “Retired clients like the concept of franking credits and high income-paying stocks,” says Darren Johns, financial planner at Align Financial on Sydney’s Northern Beaches. “We have used income or yield-focused Australian share funds for years.”

Johns uses two for clients, both of them largely passive in nature: the Vanguard Australian Shares High Yield Fund, and the BetaShares Australian Dividend Harvester Fund. The Vanguard product tracks the FTSE AFSA Australia High Dividend Yield Index, charging 0.9% on the first $50,000; that index in turn focuses on ASX-listed companies with higher forecast dividends relative to their peers. The BetaShares product is more ambitious, aiming to at least double the income yield of the broad Australian share market by rebalancing every two months in order to expose the fund to stocks that are about to pay a good dividend. It charges a 0.65% management fee plus 0.25% expenses.