The importance of yield

One of the critical issues when deciding to buy an investment using borrowed money is to estimate the income that the asset will produce so it can fully or partly offset the interest cost on the loan.

With an investment property, you want reliable tenants paying rent on time. If you lose a tenant, you want to be able to able to replace them quickly. And you want rental prices to increase over time.

It’s the same with shares. Dividends are the way a company distributes its profits and are a signal of the underlying commercial strength of the business. Income-generating shares can be attractive in a “set and forget” strategy, allowing time for the capital values to increase with limited need for extra cash flow to meet the interest payments.

Past dividend history is one benchmark of corporate strength but you need to consider whether the income will be maintained or increased in the future. For instance, many Australian companies operate in mature markets and seek expansion through domestic growth and acquisition – and the more risky offshore strategies. The key is to evaluate whether this yield can be maintained in the future.

Whilst yield is a critical issue, ease of management must not be forgotten. Property requires you to ensure the suitability of your tenants and find new ones when they leave. Direct shares require you to select, manage and handle the tax consequences, but with a share fund, the manager organises that for you.

The recent reporting season has been an interesting period with some great news stories for small to medium businesses listed on the stock exchange with their story of yield.

Recent press relating to Domino’s and Harvey Norman and the strength they have demonstrated in strong profit reporting and dividends brings a very current conversation to the importance of a strategic and well diversified investment strategy that considers both diversification and volatility in addition to strategic opportunities in pockets of the market such as small companies like these.

Read: ASX reporting season 14 stocks to watch for surprises

Read: Harvey Norman saves best for last with profits up

For a more in depth conversation about your investment strategy and the goals for your portfolio, don’t hesitate to contact your adviser today on 02 49411888