Finding Australian investments that deliver a reasonable income yield and provide some level of capital safety is slowly becoming more difficult. Cash in a bank savings account is yielding around 2%, term deposit yields have now breached 3%, while the yield on 10-year Australian government bonds is bouncing around the 4.2% mark.
For most investors, a sub-3% yield on term deposits is simply not enough to be worthwhile, especially after inflation and taxes takes the real gain to below 1%.
Bearing in mind that government bonds actually carry some risk of capital losses, more and more investors are looking to shares and property to boost investment returns. The national house rental return is 3.8%, while the yield on units is around 4.6%. These solid yields come with some downside risk and are still well below that on offer from shares.
Companies with the most reliable dividends
The best thing about term deposits and government bonds is that the income is extremely reliable, and paid on time. Investors can get similarly reliable income by investing in shares of the right companies. In the past, a reliable and growing dividend payout has been evidence of a healthy company, which should also support capital growth over time.
The most reliable companies are those that have increased dividends in each of the last three years, currently yield over 4%, and are expected to grow dividends in 2014/15.
Perhaps unsurprisingly, banks, utilities, and property groups dominate the list of the most reliable dividend paying companies on the ASX 200. All yielding around 5.5% this year, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have been income-investor favourites for the past 24 months and will likely remain so for the medium term.
Similarly, property groups have consistently delivered solid dividend yields; however usually do not carry any franking credits. This has limited the appeal to retirees, however the likes of Charter Hall Group (ASX: CHC) and Dexus Property Group (ASX: DXS) are forecast to yield over 6% in FY15, which will no doubt attract some investors.
Finally, some names that investors may not expect to see in the group are telecom group M2 Group Ltd (ASX: MTU), fast food chain owner Retail Food Group Limited (ASX: RFG), and finance company FlexiGroup Limited (ASX: FLX). These smaller companies have managed to successfully grow their businesses while the Australian economy has struggled to accelerate over the past 24 to 36 months.
Investors looking for income should look no further than the ASX200. While shares do carry more capital risk than term deposits or cash, this risk can be partially mitigated by investing in companies with strong histories, good management and a strong outlook for growth. The companies mentioned above have all of these features.