Stick to the High Ground for Income

As the decade draws to a close we are still faced with a greater degree of uncertainty than is normal. The economies of developed nations, especially English-speaking and dollar denominated, are weak. Recovery is uncertain. Will the ‘fix-its’ of Central Banks and Governments work before their effects dissipate?

Investment markets are forward looking and we are seeing presently a lot of large ups and downs as positive and then unfavourable news arrives with market participants trying to divine near term direction from the entrails of the news releases. This is the type of market behaviour we should expect to see at this stage of the economic cycle.

This state of uncertainty presents challenges for those seeking reliable cashflow from their portfolio. There are equal challenges for those seeking capital gain with near-term sharemarket returns as uncertain as levels of economic growth.

A proven strategy is to ensure household expenses are met by cashflows from the portfolio. Relying in whole or in part on capital gains for income will have treated you very badly in the last year or two and the near term prospects are no better.

But how? Cash at the bank is safe, but expensive at the moment. Interest rate increases are unlikely to come to the rescue here for 6-8 months and take even longer to reach the 8% term deposit levels of a few years ago.

Answers are to be found in our bond market, in a small range of property shares and in a limited range of quality companies with a track record of good dividend payments.

One of the good outcomes of the Global Financial Crisis has been the increase in the number of companies raising money on our debt markets. This has added depth and breadth to a very undersupplied market. There are very sound, credit-rated companies offering yields of 7-10% gross p.a. Care is needed as to how you select, mix and match these though.

Property has been much maligned of late but this has created opportunity to acquire companies that own excellent commercial property at a discount and that yield 7-10% net returns.

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