Well, it’s official. Interest rates have been cut and your bank accounts and term-deposits are about to get a whole lot less lucrative (and it’s not like it was any good before last week). Commonwealth or state government bonds aren’t looking too good going forward either. We are now getting to that fabled point that you are almost better off leaving your cash under the mattress than in a bank.
This means it’s time to have a look at what the share market is offering yield-hungry investors, as it is increasingly the only place to turn for any kind of inflation-beating returns. Here are two out-of-field options for income investors that are outside the traditional ASX blue-chips you would normally find in your typical dividend portfolio. One is a very conservative option, whilst the other might be more for the ‘crazy-brave’ income investor out there.
Vanguard International Credit Securities Index Fund (Hedged) (ASX: VCF)
This ETF from Vanguard gives investors exposure to a portfolio of global fixed-interest bonds issued by governments, government-owned entities as well as investment-grade corporations. The bonds that are held are all rated BBB- or higher, meaning that there is very minimal risk of capital loss. The ETF is hedged to Australian dollars, which means that currency fluctuations won’t affect the returns we can expect to receive. With government bonds looking very underwhelming, I believe that any investors who are still seeking fixed-interest security need to look outside the box. VCF has a current running yield of 2.95% but has returned around 6.25% over the past year. That beats any term deposit out there by a mile.
BetaShares Australian Dividend Harvester Fund (ASX: HVST)
This ETF from BetaShares is designed for maximum income. It employs a slightly controversial method of doing so-called ‘dividend harvesting’ – this involves rotating around the ASX blue chips throughout the year, buying them before they go ex-dividend and then selling them afterward (rinse, repeat). While it’s not the best way of preserving capital, it’s hard to argue with HVST’s grossed-up yield of 12.2% over the past 12 months from an income perspective. Two things to also keep in mind with HVST – the distributions are around 80% franked and are paid monthly.
The current economic climate is forcing income investors to look for unconventional solutions to the ‘interest rate problem’. If you are an income investor, these two ETFs are well worth examining to see if they can fit into your strategy.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.