The chase for yield – Elusive returns?
Enjoy the next in our exclusive subscriber-only White Paper series for 2013.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
adam goulding
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Hi Roger, I enjoyed your white paper. And have enjoyed all of the ones so far. Could you tell me if I am missing any?
1. Why the stock market doesn’t work Oct 2012
2. Interest Rates Dec 2012
3. The Chase For Yield Feb 2013
4. On The House April 2013
Roger Montgomery
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I am pretty sure we have only just begun…However I believe there was a November edition and a january one. They are published monthly at this stage but none are EVER to be seen as advice of any description. They provide education information only and you must seek and take personal professional advice of course.
Alicia Yoong
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Ok, I have never looked for yield but bought some mining shares. Did not get out in time so what do I do now???
Roger Montgomery
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Thats a great question and a difficult one to answer for any investor at any time. If you had an advisor who recommended those shares as appropriate for you, please speak to them again.
Thomas Hogg
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Roger
I have logged in and cannot even find the button to down load your monthly article on yield
Where is it ?
Thomas
Ian morphett
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Useless as I cannot login. This is despite successfully logging in to skaffold. It seems I am not the only one.
Roger Montgomery
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Your Skaffold login may be different to the login here.
gabriel mehanna
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Unable to download. the article after successfully ogging in
Gary Conlan
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I am a member, why can’t I log in??
Peter Knight
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Hi Roger, that all sounds good and I have heard all of this before when considering investing. The trouble is that all Super Funds in Pension phase are required legally to draw down a minimum percentage amount each year as a pension in order to remain compliant. This means that in order to remain compliant the fund requires income otherwise one has to sell shares to fund the minimum Pension payment. This practical real life event doesn’t accord with the theoretical world of companies retaining earnings because the ROE they can attain is superior to any investment the shareholder can achieve outside of that company. In short the scenario does not address how one is going to eat and live!
Roger Montgomery
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There are a couple of solutions. One is the company can have a renounceable rights issue to replace what it pays in dividends. two, you could sell some shares. Imagine you’d bought Berkshire in 1967 when the company wasn’t every going to pay a dividend again. That was at around $18 per share, I think, and in 2007 it traded at $147,000 per share. It hasn’t paid any dividends since 1967. If you need income sell a share. if you want to have a bit more fun, sell two.
Ned Ticic
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Hello Peter, may I suggest you hold a years pension income in cash or short term deposits to cover the expected income withdrawal i.e. 4% etc. And hold the balance in high quality businesses as suggested by RM. At the end of the year, rebalance your portfolio and redeem some stock to cash to cover the year ahead income. I suspect your pension amount is recalculated every year to be compliant anyhow.This has worked for man of my clients over the years. Food for thought. Cheers.
kurt atherton
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Vocus seems to be growing in size quickly eg over 100 staff. They are always buying other company’s out, which makes them hard to value with any certainty. I really like the space they are in but I feel it would be better for shareholders if they focused on returns rather than such rapid expansion.
alan white
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Regard me as one of those buying high yielding industrial stocks in recent times. I have given mining shares away – too many disappointments. I enjoyed reading your ‘chase for yield’ article and understand the precepts. Given that I am retiring in 4 months, my various recent purchases have been motivated (only) by the receipt of franked dividends to supplement my superannuation pension. Not sure if this is best way of going about things, but it is the income that is the driver for me. Suggestions for better alternatives would be welcome.
Roger Montgomery
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Good idea!
Denise Holland
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Can’t seem to access the article. Doesn’t want to download.
Cheers
Denise
Veronica Lim
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If you right click on the word “here” and select open in new window, you can access the report. I had trouble opening the document by double clicking.
Andrew Legget
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I think there is a belief that high yielding blue chips are the safest and closest thing to term deposits/cash investments that the people investing are used too. Also, I believe there is a belief that these companies will be held and sought after by institutions and there for the price should be pretty stable and increasing over the long term. As your Telstra example shows this is not the case.
Yield to me is neither a good or bad thing. It is just a function of the companies stage in the life cycle and managements capital allocation abilities. I will not let yield affect my decision on the company for the same reason as I ignore P/E ratios. They are in most cases meaningless ratios relating to price.
They do help paint a clearer picture of management though. I would in most cases receive larger dividends or buy backs for a mature company than have it burning holes in managements pocket and they go off and do an acquisition at a high price so a board that follows that frame of thinking is a plus for me.
I also think it helps paint a picture of how management expect the future to be. Lets use apple as an example. Under Steve jobs the company never really paid a dividend and built up a substantial cash hoard and came out with new innovation products, after jobs, apple paid a reasonably big dividend and products that have come out have not had the same impact and appear to be challenged and perhaps taken over by Samsung when it comes to innovation leadership. I do not think this is a coincidence and more of a function of the ideas drying up in Cupertino.
Yield is not investment criteria but a function of the investing decision. There for it should not in my opinion sway someone’s choice as to whether to invest or not. Like I have said before, a by-product of value investing is that the bigger the margin of safety for dividend paying companies, the bigger the yield so it just easily fits into our philosophy.