Positive gearing is always aa term I would like use when ‘preaching’always use in my seminars and online Blogs – this is a simple and effective strategy to improve overall investment return for your portfolio.
“Positive Gearing means your net income exceeds your interest payments”
, and this is one strategy that I use everytime I analyze companies.
The concept is very simple – self-explanatory, the dividend you receive must should exceed the interest you pay. Sounds simple?
But this This was is almost impossible in a boom market, when the share price was high, and average yield was less than 3% a year, where interest rate was as high as 9% a year.
In today’s market, positive gearing can be done much easier, except that many companies may cut or suspend dividends in coming months, but it is still easy to find companies that pay 6%, even 7% or 10% plus dividend yield in this market.
Dividend Is The King – Dividend tells you a lot about this company – both good and bad.
Dividend Means Cash – You need to have earnings, positive earnings to pay dividends. Well, some companies do not do that and leveraged themselves to pay dividends, i.e. borrow money to pay dividends to maintain their share price – this is a way to destroy your company’s cash reserve,
In the current environment, investors should focus on companies that can maintain good dividend payout ratio even if they are cutting their dividends.
Check the company’s dividend pay-out history, while they maybe cutting dividend payout in 2008 and 2009, if they have maintained strong dividend growth over past decades, the chance is this company is very likely to increase their dividend when the economy turns around again.
With interest rates in the world falling sharply, positive gearing is now possible again, and as stocks fall sharply, we can see a lot of amazing dividend yields coming up.
Lunch Time Strategies to Increase Dividend Yieldand dividend was not the issue.
It was a bad judgment inmy view, as dividend is always important and dividend payout trends are always a good yardstick to assess the company. In good times, I always try my best to invest in companies that have good dividend growth so that positive gearing strategy still works but maybe at a later date.
In today’s market, positive gearing can be done much easier, except that many companies may cut dividends in coming months.
In the current environment, investors should focus on companies that can maintain good dividend payout ratio even if they are cutting their dividends. With interest rates in the world falling sharply, positive gearing is now possible again, and as stocks fall sharply, we can see a lot of amazing dividend yields coming up.
- Add REITs: REITs are one of the early casualties in the sub-prime mortgage crisis, consequently, it may also be the first sector to recover. Much of the damage have been done, the surviving ones have relatively better gearing or good assets.
REITs provide regular and consistent distributions, and as they have fallen so much, many by as much as 80% to 90%, even with dividend cuts,10% yield is still achievable.
- Add Unlisted Property Funds: Another casualty from sub-prime mortgage crisis, again, they may also be the first one to recover in 2009, many unlisted property funds have relatively higher yield than listed ones.
- Add Infrastructure Stocks: Another high yield sector is infrastructure which have been under a lot of pressure due to credit squeezedue to their high debt level.
That said,not all infrastructure stocks have high debt to equity ratio, many are simply “casualty of war” and have fallen because of the industry sentiment.
Infrastructure stocks in general have consistent regular income streams, such as traffic tolls, seaport or airport charges, and are usually resilient to overall economy conditions, but debt is a major issue working against them.
One particular sector is the real estate investment trust (REIT) or known as Listed Property Trust (LPT) sectors in Australia. It is now common to find companies paying yield over 10% or even 15%, such high yield is a reflection on just how markets have reacted to the current global financial crisis.
These opportunities do exist, and as long as they can keep paying dividends, you can enjoy great returns from these companies just by holding them. But the real question is, can these companies maintain the payouts as they had in the past?
For many mining and resources companies, the great dividend days may have gonbea thing of the pasr, as commodity prices have slumped, banks, as we have seen are also cutting their dividends or even suspending them.
Property Trusts and infrastructure companies all pay attractive yields but their assets sometimes have high level of debt which could limit their payouts.
Therefore, while positive gearing is possible, it is best to use this strategy on companies that have low debt level – such as technology, IT, commercial services or consumer stapled goods or non-discretionary retail companies such as supermarkets that can maintain good cashflows in bear markets.
Alternatively, it is possibles to achieve positive gearing through managed funds, the same strategy applies – you can also further diversify your risk as well.
You will notice that I have not included financial or banking stocks above, the outlook of financial stocks remains challenging, and as we have seen in many cases, many financial institutions have suspended their dividends because of the mounting losses.