Another client reminded me last week that when he was young and wanted to borrow money to grow his business forty years ago he had to pay 20 per cent interest. Now he has money to put in the bank it is paying him 1.5 per cent. Something is amiss he says.
Many things have changed in forty years, especially inflation. It has become increasingly difficult for retirees and others seeking investment income to earn a decent rate with security. That doesn't look like changing any time soon, with interest rates now likely to stay low for longer.
In recent years people have moved towards blue chip shares paying reliable dividends. The big banks have been a favourite, paying around 5 per cent. The Covid-19 virus has torpedoed that, with the banks cutting or cancelling dividends due to expected bad debts.
Advertisements appear promising 10 or 12 per cent interest, but the security is doubtful. No fixed interest investments pay high rates with high security. Worse still the virus has crunched company profits and likely dividends.
Retirement pension plans use an entirely different method of generating reliable income, and it can be used more widely than pensions.
Pension accounts are managed funds investing in many areas, to match investors' tastes.
They reinvest all interest and dividends and instead pay out a fixed monthly amount. Investors can arrange this with non-super investment accounts too. They can choose a regular income drawdown to suit their needs while preserving capital.
For those who still prefer to choose their own shares there are industries that have been little affected by the viral pandemic.
These include mining, healthcare, insurance, and agriculture as it recovers from the drought.
Companies in these sectors that appear likely to continue paying solid dividends include BHP, Rio Tinto and Fortescue in mining, IAG and QBE in insurance, Incitec Pivot and Orica in agriculture and Medibank in healthcare. Telstra, Amcor, Macquarie Group and AGL should also pay well.
Commercial property companies like Stockland, GPT, Cromwell and Charter Hall may suffer rental income cuts short term, but their distributions will be back to normal in a year or so.
Most of these will pay more than five per cent annual income based on current prices.
Owning shares will never be as stable and secure as bank deposits but the major companies are secure from failure. Investors just need to be able to tolerate some fluctuations in value.
With the virus induced slump in investment prices there is also the opportunity to profit from their recovery over the next couple of years.
Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360
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