I was asked by Jane, a client of mine today “where is the best place to invest $100,000 if I need income?. I’m thinking about shares but given everything I’ve been hearing in the news lately, maybe I’m better off with my money in the bank”.
It’s a great question and the answer is relevant not only for those with spare cash to invest but also those who already invested in the sharemarket.
Over the past week or so we’ve seen most of the banks dropping the rates on their fixed term deposits. Given the uncertainty we are seeing on global markets, they are betting that the next interest rate move by the Reserve Bank will be down. While two weeks ago you could get about 6.1% on a fixed 90 day or two year term, this has now fallen to about 5.85% for 90 days or 5.70% for two years.
If we consider instead investing in one of the bank shares rather than deposits we’ll receive a dividend yield of around 7% based on the current price. As tax has already been paid at the company rate of 30% we get a franking credit. The pre-tax income to compare to our term deposit is known as the grossed up yield and in this case is 10% – which is more than 4% above the current term deposit rate.
“But hasn’t the sharemarket just been going down lately?” Jane asked. We’ve certainly seen global pressures and fear drive markets around the world including our own lower recently. The question though was – where is the best place to invest for income? Unless you think the banks are going to start dropping their dividends then high yielding shares look attractive right now.
If we were to throw property into the mix (assuming the $100,000 was enough for a property) we might be looking at a rental yield of 5% which drops to around 4% after costs such as agent’s fees, land tax, insurance etc. are taken into account.
So a fairly simple comparison but it helped with the decision.
Of course there are many other factors come into play such as timeframe, risk profile, diversification etc. but here I was focussed solely on the income comparison.