Selling yield as king

December 13, 2012, 5:23 pm Michael Pascoe Yahoo7

The forces that sent investors scurrying after rich fully-franked shares are not yet spent.

You know trend is in place when people start trying to sell it to you. The chase for yield has more than reached that stage, reinforced by the outlook of interests falling and likely to stay down for an extended period.

Of course the smart money has already been there and done that – the top performing sectors this year have been the banks, Telstra and listed property trusts as investors sought strong and reliable dividend flows. And straight away I’ve fallen into the usual stock market trap of talking share price movements instead of their sustainable income. D’uh!

Every pet shop galah is squawking about self-funded retirees being dudded by falling interest rates robbing them of their income from term deposits, but as explained here last week, part of the way monetary policy works is to encourage money to leave the imagined safety of bank deposits for greener fields.

The wiser investors didn’t wait for the Reserve Bank to make its message clear and have piled into solid, high-yielding shares, picking up capital gains in the process, but there’s a good argument that this phase of the investment cycle is far from over.

With much of the developed world remaining weak for years to come, global rates are down and staying down. In an important speech titled “What is Normal”, RBA deputy governor Phil Lowe has made the case for accepting that the “new normal” will indeed be a period of lower interest rates. (My argument that in many ways we have returned to normal after departing from in for two decades fits well with the Lowe script.)

So the forces that sent investors scurrying after those rich fully-franked Telstra and bank shares are not spent. And those yields remain rich even if the share price rally pauses.

The next phase is a crop of offerings seeking to meet needs beyond the big winners of 2012. An early example is the way fund manager Contango has packaged and pitched its Contango MidCap Income Limited float.

This is a “new school” listed investment company, as opposed to the “old schools” LICs that have a venerable record and make a feature of their very, very cheap management costs. The “new school” LICs have fees that are more like managed funds, but still can offer some worthwhile points of difference.

The current Contango MidCap IPO is a case in point. As the name suggests, its hunting ground is below the big market names that have enjoyed the 2012 rally. More importantly, it is promising its shareholders a dividend yield of 7.2 per cent based on whatever the share price is on July 1. The successful sister company Contango MicroCap does something similar, paying a 6 per cent yield on the July 1 price.

That MidCap dividend won’t be fully franked to begin with – the company has to first make the profits and pay tax on them before it has franking credits to pass on – but the aim is to offer fully franked dividends as soon as possible.

Of course the fund managers still have to pick the right stocks to get worthwhile performance, but the dividend promise makes it a more interesting method of gaining exposure to a diverse portfolio. Paired with some of the “old school” LICs, such as Milton and AFIC, it offers a nice alternative to ETFs and ordinary funds managers.

And yield is indeed king.

Stop Press: Well Contango Asset Management might be selling yield, but it seems retail investors aren’t game to stray from the big names just yet. Contango has pulled the Midcap IPO – or “postponed it indefinitely” – with its media release blaming the cautiousness of investors:

“In commenting on the decision, David Stevens, Managing Director of Contango Asset Management said that they recognised that it may be a little early to bring this product to market. “The major Central Banks have been encouraging investors to move out along the risk spectrum. As this process gathers momentum, investors will be attracted to a broader range of high yield equities beyond the major banks and Telstra. The Contango MidCap Income Fund is well placed to meet this need. We remain confident that midcap equities will prove to be an attractive source of income for investors and are leaving open the possibility of relaunching the IPO at a later date”.”

More from Michael Pascoe:
Forget Europe and the US, start worrying about Japan
Australia's stronger immigration - the other inflation dampener
States and retailers fooling themselves over GST

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