Commentary
Fixed Interest Not Paying the Bills?
Many people that require income from their investments have their money invested in interest bearing securities such as cash or term deposits in the bank, corporate bonds or finance company debentures. As interest rates have fallen many people have taken a significant cut in income. An alternative source of income is dividends from shares.
The sharemarket has been considered by many as where you "make" money by buying shares with the expectation of selling them at a profit. This is speculating that carries with it the risk that the shares wont go up in price and you wont make a profit, or worse go down so you make a loss when you sell. Some share tippers and traders completely disregard dividends as a source of return.
Have you considered investing in shares for income?
Most established companies pay out a portion of their profits as dividends to shareholders. The first of the SOEs floats, Mighty River Power is expected in September. Mighty River Power has the potential to be an ideal income stock if the Government prices it appropriately.
The current average historical yield on New Zealand shares is nearly 7.0% after tax at 30%.
Fletcher Building has a historical dividend yield of 5.27%, Telecom 6.26%, Restaurant Brands 7.8% and The Warehouse Group 8.18%.
We originally reported Cavalier Corporation on a 10.78% yield, that was correct, but it was also an historical yield. Cavalier has suspended dividends for the 2012 year it hopes to reinstate them in 2013.
The current ten year interest rate is 2.8% after tax at 30%.
At current yields shares are definitely worth considering as a source of income. But as always you must bear in mind the different risk profiles.
If you would like to discuss how to build a diversified portfolio of income generating shares please ring Jonathan or Andrew on 07 578 3863 or 0800 867 323 for a no obligation chat, the first half hour is free so what have you got to lose?
US Housing prices reached their peak in July 2006, according to the S&P/Case-Shiller index of values in 20 US cities. A month before that Mark Kiesel sold his house.
Mark Kiesel is a managing director with Pacific Investment Management Co (PIMCO). An American fund manager with over $1.3 trillion under management and the largest bond investor in the world. So when PIMCO executives speak the markets usually pay attention.
Back in 2006 Kiesel had concluded that a combination of factors including excess home construction and lax lending standards set the stage for a crash. “It’s not just houses that will be for sale. You’re going to see financial assets for sale over time, and ultimately corporate bonds.”
Next weekend Kiesel moves into a house he has just purchased. On 5 May 2012 he wrote in Global Credit Perspectives published on the PIMCO website entitled "Back In" he says “I’m not sure U.S. housing prices have bottomed -- only time will tell -- but there are many more positives today than there were six years ago when I sold my house.”
A brief summary of Kiesels article can be found on Bloomberg Pimco Housing Bear Kiesel Says Its Time To Start Buying.
Click here to read the full PIMCO Global Credit Perspectives article "Back In"
Improvement in sentiment in the US housing sector is likely to stimulate the economy through:
- increased economic activity - building permits were up 33% year on year to March 2012
- improvement in consumer confidence which will likely lead to greater spending, and
- improvements to bank balance sheets, which will likely mean they will be more willing to lend.
Improvements in the US economy is likely to benefit its trading partners, and so should eventually flow through to improvements in our economy.
Is your portfolio positioned to benefit if Mr Kiesel is right again? If not call us on 578 3863 to discuss options.
Did you know that if you have sold a bond, or other fixed interst security at below the price you payed for it the losses you have made may be deductible for income tax purposes?
Likewise if you sell, or it matures, at a higher price you may be liable for tax on the gain.
Talk to your accountant or tax professional to see whether this applies in your situation.
If you think about it, it does make sense. The Yield to Maturity (YTM) is used to help work out the price of a bond. The YTM includes the total income the investor will receive over the life of the bond, including the difference between purchase price and the face value. And of course in New Zealand tax is assessed on income.
Under normal trading conditions we can sell your shares within minutes of you placing the order, and have the money in your account three business days later.
If
- you already have a share trading account, and
- the share is regularly traded, and
- you are prepared to accept market price
However if you don't already have a share trading account you probably wont be able to place your order until the next business day at the earliest. If you don't have all the correct documentation ready it might take a couple of weeks or more before you can get your money.
Wouldn't you like the peace of mind of knowing you can sell now rather than later?
Click the link below to learn more and get your share trading account set up and ready to go. We'll need you to complete some forms of course and we'll need photographic ID and your CSN and FIN number.
Numbers, Numbers and More Numbers.
A CSN is always nine digits long and always starts with 33, if your number doesn't, it isn't so get one.
If you decide you want to sell your New Zealand listed securities (shares, notes or bonds) "on the market". You can only do so if you have a Common Shareholder Number (CSN). A holder number or shareholder number and a CSN number are NOT the same thing.
If you don't already have a CSN your broker will first have to get a CSN generated. This isn't difficult or complicated (for you) but it does take time, so it delays the sale process. Instead of selling this morning you might have to wait a day or two. As you know prices can move significantly in a day or two.
So what should you do?
If you don't nominate the correct RWT rate it could be costing you money
In New Zealand most investment providers (Banks, Companies and Fund Managers) are required by the Inland Revenue Department (IRD) to deduct Resident Withholding Tax, commonly referred to as RWT from taxable income payments they make to you.
The idea behind this is that the tax is paid as you earn it and so you don't have to pay it at the end of the year when (or if) you file your tax return.
It is good for the Government as it gets the money earlier and for you the taxpayer it means that you don't have to find a lum sum at the end of the year.
It is important that you provide your IRD number to you bank and anyone else you have money invested with and nominate the rate at which you want them to deduct RWT. If you don't proivide you IRD number or don't nominate a rate RWT will be deducted at the highest rate of 33%.
If your interest compounds and RWT is deducted at a higher rate than necessary it means you are missing out on the interest on the "extra" RWT that has been deducted and paid to the IRD.
Some people don't mind that as it means there is less likelihood of facing a bill for additional tax at the end of the year, some people even nomiate a rate they know is too high to increase the chances of getting a tax refund. And thats fine as long as you realise that it is costing you money.
For more information see "Make sure you're using the right RWT rate" on the IRD's website