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In a rapidly evolving response to the spread of COVID-19, the Federal Government’s second support package announced over the weekend has flicked the switch to more income support for retirees and workers.

Between the first $17.6 billion package announced on March 12, and this latest $66.1 billion package, the emphasis has shifted from stimulus aimed at keeping businesses up and running, to support for individuals to get them through the crisis.

Importantly, casuals and sole traders along with employees who lose work due to the coronavirus shutdown will receive help.

Retirees affected by falling superannuation balances and deeming rates out of line with historically low interest rates have also been offered some reprieve.

Minimum pension drawdowns halved

Self-funded retirees will be relieved the Government has moved quickly to temporarily reduce the minimum drawdown rates for superannuation pensions.

Similar to the response in the wake of the Global Financial Crisis, minimum drawdown rates for account-based pensions and similar products will be halved for the 2020 and 2021 financial years.

This means retirees will be under less pressure to sell shares or other pension assets in a falling market to meet the minimum payments they are required to withdraw each financial year.
For example, a 75-year-old retiree will now be required to withdraw a minimum of 3 per cent of their super pension balance this financial year and in 2020-21, instead of the usual 6 per cent.

The new rates are in the table below:

Deeming rates cut again

In addition to the cut in pension deeming rates announced in the first stimulus package, the Government has cut deeming rates by a further 0.25 percentage points. This reflects the Reserve Banks latest cut in official interest rates to a new low of 0.25 per cent.

Deeming rates are the amount the Government ‘deems’ pensioners earn on their investments to determine eligibility for the Age Pension and other entitlements, even if that rate is lower than they actually earn.

This move will bring deeming rates closer in line with the interest rates pensioners are receiving on their bank deposits, especially those with lower balances.

From 1 May 2020, deeming rates will fall to 0.25 per cent on investments up to $51,800 for singles and $86,200 for couples. A rate of 2.25 per cent will apply to amounts above these thresholds (see table).

Early access to super

More controversially, the Government has also announced it will allow anyone made redundant because of the coronavirus, or had their hours cut by more than 20 per cent, to withdraw up to $10,000 from their super this financial year and a further $10,000 in 2020-21.

Sole traders who lose 20 per cent or more of their revenue due to the coronavirus will also be eligible.

The Treasurer said the process is designed to be frictionless, with eligible individuals able to apply online through MyGov rather than going to their super fund.

While this provides an additional safety net for individuals and families who face the loss of a job or a significant fall in income, we do urge our clients to consider accessing their super as a last resort.

Taking a chunk out of your retirement savings now, after a big market fall, would not only crystallise your recent losses but it also means you would have less money working for you when markets recover.

So before you do anything, speak to us and look at other income support measures.

Relief for those out of work

All workers, including casuals and sole traders, who lose their job or are stood down due to the coronavirus shutdown, will be eligible for a temporary expansion of Newstart (now called JobSeeker) payments to new and existing recipients.

Individuals who meet the income test will receive a coronavirus supplement of $550 a fortnight on top of their existing payment for the next six months. This means anyone eligible for JobSeeker payments will receive approximately $1100 a fortnight, effectively doubling the allowance.

This measure includes people on Youth Allowance, Parenting Payment, Farm Household Allowance and Special Benefit.

Importantly, the extra $550 will go to all recipients, including those who get much less than current maximum fortnightly payment because they have assets or have found a few hours of part-time work.

Support for pensioners

Pensioners have also received additional support. On top of the $750 payment announced on March 12, an additional $750 will be paid to any eligible recipients, as at 10 July 2020, receiving the Age Pension, Veterans Pension or eligible concession card holders.

This payment will be made automatically from 13 July 2020.

More support to come

This latest support package is unlikely to be the last as the Government responds to a rapidly evolving health crisis and progressive shutdown of all but essential economic activity.

If you have any questions about your investment strategy or entitlements to government payments, please don’t hesitate to call.

Information in this article has been sourced from https://treasury.gov.au/coronavirus/households

With interest rates at historic lows and likely to stay that way for some time, retirees and other investors who depend on income from their investments are on the lookout for a decent yield.

Income from all the usual sources, such as term deposits and other fixed interest investments, have slowed to trickle. Which is why many investors are turning to Australian shares for their reliable dividend income and relatively high dividend yields.

The average dividend yield on Australian shares was 5 per cent in 2019 and more than that for many popular stocks.

By comparison, returns from traditional income investments are failing to keep pace with Australia’s low inflation rate of 1.7 per cent. Interest rates on term deposit from the big four banks are generally below 1.4 per centⁱ, while the yield on Australian Government 10-year bonds is around 1.2 per cent.ⁱⁱ

Sources: RBA, Canstar, CoreLogic Home Value Index

But with shares entailing more risk than term deposits or bonds, is a dividend income strategy safe?

Dividends provide stability

When comparing investments, it’s important to look at total returns. The total return from shares comes from a combination of capital gains (from share price growth) and dividend income. While market commentary tends to focus on short-term price fluctuations driven largely by investor sentiment, dividend income is remarkably stable.

Over the past 20 years, dividend income has added around 4 per cent on average to the total return from Australian shares.

For example, in 2019 the All Ords Index (which measures the share price gains or losses of Australia’s top 500 listed companies) rose 19.1 per cent. When dividends were added, the total return was 24.1 per cent. While that outstanding performance is unlikely to be repeated in 2020, it shows how dividends are the icing on the cake in good times and a buffer against short-term losses in difficult times.

So how are dividend yields calculated?

Calculating dividend yields

To work out the dividend yield on a company’s shares you divide the latest annual dividend payments by the current share price.

Take the example of BHP Billiton. Its shares were trading at $37.41 in December after paying annual dividends of $1.9178, providing a dividend yield of 5.13 per cent ($1.9178 divided by $37.41). When you add franking credits, the ‘grossed up’ dividend yield is 7.32 per cent.ⁱⁱⁱ

Franking credits are a type of tax credit compensating shareholders for tax the company has already paid. Companies such as BHP with fully franked shares will have franking credits equal to 30 per cent of the gross dividend value. This is not a recommendation for BHP, simply an illustration of how dividend yields are calculated.

Australia’s major banks have a long history of strong profit growth and reliable dividend income, making them popular with income investors, along with household names such as Wesfarmers, Woolworths and BHP Billiton.

But a big dividend yield is not always better. So how can you spot a quality dividend?

Quality counts

When companies earn a profit, directors must decide how much to pay out to shareholders in the form of dividends and how much to reinvest in the company to grow the business.

Because of the way they are calculated, a high dividend yield may signal a company with limited growth prospects, a falling share price, or both. Sometimes it’s the result of a one-off special dividend.

Investors looking for a reliable income stream need to focus on companies with quality assets and strong management teams, good growth prospects and sustainable earnings. This is what will determine the future growth in dividends and/or the share price.

In the current low interest rate, low economic growth and low inflation environment, many companies have taken a cautious approach and rewarded shareholders with higher dividends. As growth picks up, companies may allocate a greater share of profits to growing their business. Australia’s economic growth is forecast to pick up to 2.25 per cent in 2019/20 from 1.7 per cent last year.^iv
Relying too heavily on dividends from Australian shares could also expose you to risk or mean missing out on opportunities elsewhere.

Consider the big picture

When hunting for a good dividend yield, it’s important to follow fundamental investment principles such as diversification. That means holding shares from a variety of market sectors, with good prospects for growth and income. If your share portfolio consists entirely of bank stocks, for example, you risk losing money if the sector falls out of favour.

Diversification is also important across asset classes. The total return from Australian residential investment property was 6.3 per cent in 2019 (from a combination of price movements and rental yields), but in other years the performance of shares and property could be reversed.^v

And despite their lowly returns, holding term deposits with different maturity dates allows you to manage your cash flow. It also helps avoid having to sell your shares and crystallise losses in a market downturn.

If you would like to discuss your income needs within the context of your overall investment portfolio, give us a call.

i https://www.canstar.com.au/term-deposits/highest-term-deposit-rates/

ii https://tradingeconomics.com/bonds

iii https://www.marketindex.com.au/analysis/dividend-yield-scan-6-december-2019

iv https://budget.gov.au/2019-20/content/myefo/index.htm

v https://www.corelogic.com.au/news/corelogic-december-2019-home-value-index-strong-finish-housing-values-2019-corelogic-national

It was a year of extremes, with shares hitting record highs and interest rates at historic lows. Yet all in all, 2019 delivered far better returns than Australian investors dared hope for at the start of the year.

The total return from Australian shares (prices and dividend income) was 24 per cent in the year to December.ⁱ When you add in positive returns from bonds and a rebound in residential property, Australians with a diversified investment portfolio had plenty to smile about.

Humming along in the background, Australia entered a record-breaking 29^th year of economic expansion although growth tapered off as global pressures mounted.

Global economy slowing

The US-China trade war, the Brexit impasse and geopolitical tensions weighed on the global economy in 2019. Yet late in the year optimism grew that US President Donald Trump would sign the first phase of a trade deal with Beijing. The re-election of Boris Johnson’s Conservatives in the UK also raised hopes that the Brexit saga may finally be resolved.

The US economy is in good shape, growing at an annual rate of 2.1 per cent in line with inflation and a jobless rate of just 3.5 per cent. China has fared worse from the trade tensions, with annual growth of 6 per cent its weakest since 1992.

In Australia, growth slipped to an annual rate of 1.7 per cent in the September quarter. Inflation, at 1.7 per cent, is well below the RBA’s target and unemployment is stuck around 5.2 per cent.ⁱⁱ

Despite the global slowdown, higher commodity prices were a major contributor to Australia’s healthy trade surplus in 2019.ⁱⁱⁱ

* Year to September 30,2019 Sources: RBA, Westpac Melbourne Institute, Trading Economics

Commodities prices mixed

Iron ore prices rose 28.7 per cent in 2019 following a mine disaster in Brazil which reduced global supply. Other major Australian exports to receive a boost were gold, up 18.5 per cent, and beef, up 32 per cent.^iv

At the other end of the scale, thermal coal prices fell 34 per cent and liquefied natural gas (LNG) was down 44 per cent.^v

Middle East tensions and tighter supply led to a surge in crude oil prices, with Brent crude up almost 21 per cent.^vi As Australia is a net importer of oil, a jump in oil prices coupled with a fall in the Aussie dollar filtered through to higher petrol prices for motorists.

Interest rates at new lows

In an effort to stimulate the economy, the Reserve Bank cut the cash rate three times in 2019 to an historic low of 0.75 per cent. The US Federal Reserve also cut rates to a target range of 1.50-1.75 per cent. This was the main reason the Australian dollar lifted from its decade low of US67c in October to finish the year where it started, around US70c.^vii

Rate cuts flowed through to yields on Australian 10-year government bonds which fell to just 1.37 per cent.^viii However, falling bond yields result in higher bond prices and this lifted total returns from government bonds by around 8 per cent.^ix

Retirees and others who rely on income from bank term deposits had another difficult year, with interest rates generally below 2 per cent. After inflation, the real return was close to zero.^x It’s little wonder then that many looked elsewhere for a better return on their money.

Bumper year for shares

The hunt for yield was one reason Australian shares jumped 18.4 per cent in 2019, the best performance in a decade.^xi The market climbed a wall of worries to hit a record high in November on optimism about a US-China trade deal, then eased back on concerns about slowing economic growth.

Despite low interest rates and personal tax cuts, consumers are reluctant to spend. The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.1 in December – anything below 100 denotes pessimism.^xii

Property prices recovering

Australian residential property prices rebounded strongly in the second half of 2019, driven by lower mortgage interest rates, a relaxation of bank lending practices and renewed certainty around the taxation of investment property following the May federal election.

According to CoreLogic, property prices rose 2.3 per cent on average, led by Melbourne and Sydney, both up 5.3 per cent. Also up were Hobart (3.9 per cent), Canberra (3.1 per cent) and Brisbane (0.3 per cent). The only capitals to fall in value were Darwin (-9.7 per cent), Perth (-6.8 per cent) and Adelaide (-0.2 per cent).

When rental income is included, the total return from residential property was 6.3 per cent.^xiii

Looking ahead

Property prices are expected to recover further this year but with shares looking fully valued and bond yields near rock bottom, returns could be more modest.

The Australian government is under pressure to do more to stimulate the economy in the short term to head off further rate cuts by the Reserve Bank. More fiscal stimulus could inject fresh life into the local economy and financial markets.

Overseas, the US-China trade war is far from resolved and could remain up in the air until after the US Presidential election in November. There is also uncertainty over the Brexit deal and its impact on trade across Europe.

The one thing we do know is that a diversified investment portfolio is the best way to navigate unpredictable markets.

If you would like to speak to us about your overall investment strategy, give us a call.

i Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019

ii Trading Economics, viewed 1 Jan 2020, https://tradingeconomics.com/indicators

iii https://dfat.gov.au/trade/resources/trade-statistics/Pages/australias-trade-balance.aspx

iv Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/commodities

v Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019

vi Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/commodities

vii Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/currencies

viii RBA, https://www.rba.gov.au/statistics/tables/#interest-rates

ix Economic Insights: Year in Review; Year in Preview, CommSec 2 January 2020.

x Canstar, https://www.canstar.com.au/term-deposits/highest-term-deposit-rates/

xi Trading economics, viewed 1 January 2020 https://tradingeconomics.com/stocks

xii https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20191211BullConsumerSentiment.pdf

xiii https://www.corelogic.com.au/news/corelogic-december-2019-home-value-index-strong-finish-housing-values-2019-corelogic-national