Yesterday I wrote how with the RBA’s cash rate at 1% returns from cash savings in products like term deposits are all but dead.
As once we adjust for inflation the real return on a term deposit or cash saving rate of 1.5% is likely to be around nothing.
A retiree or anyone else with substantial cash savings who makes the mistake of leaving a large proportion of their net wealth in cash over say the next 2 to 4 years will really only realise the magnitude of their mistake in 5 years’ time when assets such as shares and property have soared in value on the back of a liquidity flood, while their cash has generated virtually no returns.
Unfortunately, this double-whammy multiplier effect will likely only become apparent to many people when it’s too late to prevent it.
To avoid it one option is to buy an investment property to generate higher returns, after all credit is cheap, but property investing comes with a lot of costs such as stamp duty, agent, maintenance and strata fees.
A better option then might be to buy dividend-paying shares, but you’ve got to be careful as share market investing carries higher risks. This might sound scary, but with more risk comes the potential for higher returns.
One common mistake to avoid though is buying shares only for income, as share market investors should be principally concerned with capital returns above all else.
In fact if you buy shares just because the dividends look attractive you might be increasing your chances of capital losses.
This is because psychologically anchoring to the perceived “safety” of dividends in buying popular shares like Telstra Corporation Ltd (ASX: TLS) or Westpac Banking Corp (ASX: WBC) is likely to be a mistake in my view.
As a rule of thumb then you could ask yourself if this company paid no dividends and just completed share buy backs would I still buy it?
If the answer is no, then don’t buy it just because the dividends look good.
With that in mind let’s take a look at three businesses that might offer investors decent capital returns and additional dividend payments as a bonus.
Macquarie Group Ltd (ASX: MQG) is forecasting FY 20’s profit to be slightly down on FY 19’s record result, although I’m guessing its new CEO is being conservative in her guidance as she would not want to cough up a profit downgrade during her first financial year in the job. If we assume the bank maintains yearly dividends at $5.75 per share (plus partial franking) it offers a yield of 4.53% based on a $126.90 share price.
Flight Centre Travel Group Ltd (ASX: FLT) has global leisure and business travel operations and an excellent long-term track record of dividend growth.
At $43.4o shares trade at just 12.6x the mid-point of its net profit forecast for FY 2019. Moreover, it has an extremely strong balance sheet with just $35.8 million in debt and $394 million cash on hand.
This alongside a moderate dividend payout ratio around 60% suggest its dividends should grow over time. It paid a $1.49 per share special dividend in 2019, which reflects its balance sheet strength and even if we back that out it still paid $1.67 per share in dividends over the past 12 months. That puts it on a 3.84% trailing yield plus full franking credits.
Scentre Group (ASX: SCG) is the operator of the Westfield shopping centres in Australia that I expect have a sufficient stranglehold on prime real estate in major cities to survive the competition from online shopping. As such it offers defensive investors reliable cash flows and dividends. Based on a $3.96 share price and forecasts for dividends of 22.6 cents per share it offers a 5.7% yield. As a bonus it’s also set to undertake an $800 million share buy back.
I’d be reasonably comfortable buying all three of these businesses today for income, although of course all of them carry substantial downside risks due to market forces. As such they should only be a small part of a balanced investment portfolio.
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