Investing for income

Posted: March 26, 2009

Where can you put your money to make it work for you?

It goes without saying that income generation is a very difficult task at present – particularly when you are attempting to stop any further erosion of your capital.
 
Interest rates have been cut by 4% since their height in March 2008, when the Reserve Bank of Australia was trying to dim the inflation flame.  Listed companies are experiencing the full effects of the economic slowdown and are forecasting lower earnings.  In many cases that translates into lower dividends. 

Residential property values are expected to soften further, although rental returns have been on the rise for some time due to a lack of supply.  Commercial property prices and rents are on a downward trend.  Bond prices are particularly high at present and offer minimal returns in line with lower interest rates.  The corporate debt market offers better income returns but at greater risk (perhaps).

Experts agree that there is no easy answer here.  Just like picking the peak of the market, no-one knows exactly when the economy will pick up again and when asset values are at their cheapest, until well after the event has happened. Everyone has a very healthy “Harry Hindsight” account and an even healthier “should’ve, would’ve, could’ve” account.

What we do know is that many companies are restructuring their businesses, engaging in cost-cutting programs and streamlining their processes in an attempt to contain their expenses so they can maintain respectable profits and cash-flows.  As the benefits to these restructured businesses are reaped through lower costs, including significantly lower interest costs, their dividends should look attractive against a backdrop of cheaper share prices.  Dividends may reduce in the short term but they are still expected to be superior to cash and term deposit rates. 

There are also opportunities in corporate debt markets to achieve a higher rate of return.  However the likelihood of further deterioration in this area needs to be weighed up against the potential windfall gains arising from improved market conditions.

The importance of researching prospective investments and recognising the potential outcomes is magnified under the current investment market conditions.  The main thing to bear in mind is that diversification should remain an important aspect of your portfolio.  As the economy improves you do not want to be on the sidelines and have missed out on the opportunities.