Peter: Hello and welcome to Switzer Investing Insights brought to you by nabtrade. And today we want to talk about how can you get 5% income return on your investments. Clearly for a safer kind of investor, but certainly there are a lot of investors out there who would like to get exactly that, Paul.
Paul: Yeah, I think the first point we should make, Peter, of course, is that with term deposits paying about 0.4%, anything that promises or has the prospect of a higher return is, by definition, risky.
Paul: Right. Yeah. Term deposits, government guaranteed, that's effectively riskless. Anything else is riskier.
Peter: Yeah. And going up the risk curve as we say.
Paul: Absolutely. So that's the first point. There's no such thing as a free lunch, and there's no such thing as an investment that doesn't entail some degree of risk. And potentially the higher the expected return, the higher the risk.
Paul: Now, it's important to understand what we mean by risk. And I think people usually get a couple of things, but there's a third component. Obviously the idea of capital loss. I think everyone gets that, we talk about risk. But generally, risky investments also have more price volatility.
Paul: In other words, if the pick of the list of investments. If you're looking at a market price, you could be a bit shocked by what the market price is one day. And we saw that at the height of the...
Paul: Coronavirus crash. But there's also a third factor too, and that could be underperformance. You can have an investment that promises a higher return, but it might do that by actually, the type of stocks it invests in, that are particularly low volatility and what we call, low beta. And so, if the market goes up a lot, it may only go up a little bit. So you can underperform with an investment.
Peter: It's a bit of a trade-off, Paul, isn't it.
Paul: Yeah, particularly promising a higher income. So I think that's important. The other thing of course, is we wanted to show you some investments that are themselves reasonably diversified. So, one of the challenges is there's lots of single shares out there that potentially pay high dividends. But look, potentially a lot of single event risk, if the CEO gets it wrong or has an accident or something else.
Peter: Well, classic case was AMP.
Peter: A good income payer, but a lot of things have gone wrong. Now by being diversified, having say 20 or even 30 stocks, it would actually be a small implication on your overall income.
Paul: So let's show you some diversified options to actually get that. The first one is Vanguard's Australian Shares High Yield ETF. This is a very low cost, exchange traded fund.
Paul: But it invests in companies with higher forecast dividends. So it uses an index. The index gets analysts' forecast and actually identifies companies that have higher than market forecast dividends. It achieves diversification so that it has limits. So it doesn't get too much in one sector, or too much in one company. Ends up with about 63 different stocks.
Paul: It's trading on a forecast dividend yield of 4.3%. So, that's pretty well almost close to fully franked. And so that grosses up to over a 6% income return for those that can take the maximum advantage of franking.
Peter: And I think this chart shows one really important thing, Paul. That even something that invests in some of the best quality companies in Australia, during the coronavirus, it crashed. And as long as people stuck with it, it bounces back.
Paul: Yeah. And that's the key point. That's a five-year chart, Peter. And as you see, you see the huge dip during the coronavirus crash. But today, the underlying ETF is trading at a higher price than it was five years ago.
Peter: Yeah. Good point.
Paul: The second one is a listed investment company. This investment company's been around for almost two decades.
Paul: It's called Djerriwarrh. And it comes out of the house of the broker JB. Were.
Paul: They're also the same team, or the team that manages Australian foundation investment company. That's Australia's biggest listed investment company. Djerriwarrh is about an $800 million listed investment company. Now, it aims to pay a higher level of dividend than the market, and also provide capital growth. And the way it does that is it invested in leading companies. But it also enhances the income by writing call options over some of those companies.
Peter: Which can work, but sometimes doesn't.
Paul: Which can work and sometimes doesn't. And to be honest, over the last few years, its performance has slipped a little bit. Now, what's interesting about Djerriwarrh, Peter is that for many, many years, this listed investment company was trading at a huge premium to its NTA. In other words, where it was trading on the ASX was a lot higher than what...
Peter: The overall value of it.
Paul: The overall value of the investments. It's actually switched around to a bit of a discount. And that's because it's performance slipped, but it's actually come back quite well in the last 12 months. And I think this is quite interesting, because not only will you get more than a 5% yield, but you've also got a bit of a chance to catch up on the NTA. This is a well managed company, long track record. And I think this is something you can afford to back.
Peter: And you're also implying that it pays higher income, therefore it's more risky. And that's why it probably hasn't rebounded as well as the Vanguard version.
Paul: Yeah. Let's change asset classes and let's go into the bond field. Now, to do that would mean we've got to go into some higher risk bonds because we all know government bonds are...
Peter: Like term deposits.
Paul: Like term deposits, right? So, this is what's called the NB Global Corporate Income Trust. It trades under the acronym or the ticker of NBI. The manager is a New York-based bond manager called Neuberger Berman. It's a $909 million listed trust that invests in a portfolio of high yield bonds of large, liquid global companies.
Paul: Now, they are very well diversified by industry, geography and issuer. It's got somewhere between 250 and 350 different bonds in the fund. But the credit quality is below investment grade, so there is considerable credit risk in a fund like this. It's targeting a return of four and a half percent. It's actually going to be better than that this year. It's actually just raised its forecast.
Paul: And on the current ASX price, because it's now trading at a bit of a discount to its underlying value, it's yield will creep over 5%. Now, you can see what happened there in the coronavirus crash. It actually dipped to about $1,20. The ASX share price has come back to about a $1,83, $1,85.
Peter: And anyone who bought at the bottom, has made a lot of capital gain plus the income as well, but it would have been a high risk strategy.
Paul: It hasn't got back to where it was before the crash, but that's because it moved from basically trading at a small premium to a small discount. And that I think reflects some of the things that the market learning. So there are three ideas, different fields, equities, and also on the bond side, where you can factor in return of 5%.
Paul: Now, there's a whole lot of other investment opportunities on the ASX that also do this. Some of the other ASX quoted funds are things like the Switzer Dividend Growth Fund and the Einvest Income Generator. They're fairly similar in terms of what they try to do. We almost describe as sensible, blue-chip investing, Peter, for the Switzer Dividend Growth Fund. But there's also things in the back into the securities and bond area. One is the Qualitas Real Estate Income Fund or trading under the ticker, QRI.
Peter: Yeah. And I think the bottom line is this, Paul. You're showing a good range of alternative assets for people who are chasing income. And I think the idea, is we always diversify with stocks. Why not diversify when you're chasing income? Put a whole lot together, give you less exposure to any one fund manager. But the overall return looks like, as you pointed out, over 5%. And that's a few ideas on how you can get a 5% return on your investments. That's Switzer Investing Insights brought to you by nabtrade. Thanks for joining us.