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investment yield

What is Investment Yield?

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What is an investment yield? The yield an investment provides is basically its annual cash flow divided by the value of the investment.

  • For bank deposits the investment yield is simply the interest rate, eg bank 1 year term deposit rates in Australia are around 2.4% and so this is the cash flow they will yield in the year ahead.
  • For ten year Australian Government bonds, annual cash payments on the bonds (coupons) relative to the current price of the bonds provides a yield of 2.5% right now.
  • For residential property the investment yield is the annual value of rents as a percentage of the value of the property. On average in Australian capital cities it is about 4.2% for apartments and around 2.8% for houses. After allowing for costs, net rental yields are about 2 percentage points lower.
  • For unlisted commercial property, investment yields are around 6% or higher. For infrastructure investment it averages around 5%.
  • For a basket of Australian shares represented by the ASX 200 index, annual dividend payments are running around 5.3% of the value of the shares. Once franking credits are allowed for this pushes up to around 6.9%.

Investment Yield

Yield and total return

The yield an investment provides forms the building block for its total return, which is essentially determined by the following.

Total return = yield + capital growth

For some investments like term deposits the yield is the only driver of return (assuming there is no default). For fixed interest investments it is the main driver – and the only driver if bond investments are held to maturity – but if the bond is sold before then there may be a capital gain or loss.

For shares, property and infrastructure, capital growth is a key component of return, but dividends or rental income form the base of the total return. Prior to the 1960s most investors focused on yield, particularly in the share market where most were long term investors who bought stocks for dividend income. This changed in the 1960s with the “cult of the equity”, as the focus shifted to capital growth. It was pushed further through the bull markets of the 1980s and 1990s. Similarly at various points in the cycle real estate investors have only worried about price gains and not rents.

Key issues for investors to consider

In searching for a higher investment yield investors need to keep their eyes open. It’s critical to focus on opportunities that have a track record of delivering reliable earnings and distribution growth and are not based on significant leverage. In other words make sure the yields are sustainable. On this front it might be reasonable to avoid relying on some Australian resources stocks where current dividends look unsustainable unless there is a rapid recovery in commodity prices.

To get your finances heading in the right direction, call our office now, make an appointment and we will conduct a thorough review to ensure your portfolio matches you goals and you are getting your share of investment yields. To read the entire article from AMP’s Dr Shane Oliver, please go the the following link, Oliver’s Insights.

Investment information overload

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The technology revolution has made it easier and easier to track our investments, and perhaps suffer from investment information overload. Within this revolution, some of the news is balanced, but a lot of it is not.

investment information overload

Human nature is naturally cautious because our brains evolved at a time when we had to be on the lookout for physical threats. As a result bad news always attracts more interest and so “bad news sells”. Of course, this also applies to financial news. But it also feeds into a common behavioural trait called “myopic loss aversion.” And here lies the threat to our long term financial health as a result of investment information overload.

When the value of an investment falls it makes sense that unless something has fundamentally gone wrong investors should be thinking about increasing their allocation to it to take advantage of it now being cheaper and better value and therefore offering better return prospects. The reality though is that many are motivated to do the opposite as the distaste for loss combines with another well-known behavioural trait called “recency bias” that causes investors to give more weight to recent events than they should so they project recent news of falls in their investment into the future.

The information overload we are now seeing is likely to be reinforcing this because it is increasing our exposure to news about our investments. And this constant feedback is likely adding to “myopic loss aversion”.

By contrast if you only look at how the share market has gone each month and allow for dividends the historical experience tells us you will only get bad news (ie a loss) 35% of the time in Australia and the US. The key I think is to find ways to turn down the volume on financial news because if you are exposed to it less frequently you are less likely to make decisions that are contrary to your long term investment goals.

…for the whole article please go to the following link from AMP Capital’s Head of Investment Strategy and Chief Economist, Shane Oliver.

Investment Information Overload

Investments

Has low investment growth settled in?

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Global investment growth has been sub-par and is likely to remain so for a while yet. The same applies in Australia. This means low inflation, low interest rates, periodic growth scares and potentially a longer economic cycle. For investors, it means ongoing low returns on bank interest and constrained investment returns. But it’s not all bad – if investment growth were stronger we would return to worrying about high inflation and much higher interest rates.

Investment growthSlow and uneven investment growth reflects a whole range of factors:-

While the GFC was seven years ago now, it appears to have had a more lasting effect on confidence

It seems we have been seeing a series of global economic calamities

Rising inequality has been weighing on consumer spending

Slower labour force growth

Weaker growth in emerging countries

The implications are for continuing low interest rates, average returns are likely to be constrained and the economic cycle is likely to be longer then normal. Baring a shock – such as a major geopolitical event – the next major global economic downturn looks like being several years away yet. Which in turn suggests that the cyclical bull market in shares as a way to go before we see stronger investment growth.

When real economic growth is running around low levels and is fragile, periodic growth scares are likely to occur more often as the fear that adverse developments will trigger a return to recession is greater as there is less of a growth buffer. As we have seen since the GFC, these can be triggered by bad weather, military flare ups like in Ukraine, the Middle East, etc. Such growth scares keep investors nervous. So we have seen a sense of ongoing scepticism about the recovery in the global economy and in share markets that has occurred since the GFC. Investors have never quite fully bought the recovery story.

…for the whole article please go to the following link from AMP Capital’s Head of Investment Strategy and Chief Economist, Shane Oliver.

What does low investment growth mean