Rob Coyte's Blog

A major concern was the fact that the government was thinking about tinkering with franking credits derived by individuals and superannuation funds from their Australian share portfolios. However, Wayne Swan as effectively quashed these rumours by saying “I personally think dividend imputation has delivered an enormous benefit to the Australian economy”.

However, there will be changes at some point and one such change may be in the Transitional to Retirement Strategy which will impact anyone over 55 years old. This being the case we would implore you to discuss with us your options before the upcoming budget because very rarely are these changes applied retrospectively.

The government has already announced a whole range of measure to make it harder for individuals to gain access to Family Tax Benefits, Seniors Concession Cards and other benefits by changing the definition of income. These measures will be introduced on 1 July 2009 please refer to  article titled Definition Changes to Income For Government Benefits for more information or contact our office.

A couple of weeks ago Queensland's richest man, Clive Palmer, bought a Brisbane office tower for $20 million. The property, which is fully occupied, will earn him about $2.2 million per annum in net income for a yield of around 11%. His comments to the media were simply “The yields on property are a hell of lot better than they are in the bank”.

The simplest lessons are usually the most effective and here you have a transaction where the income from the property is considerably more than in the bank (alternatives). Investing is about assessing the alternatives and it is this very reason that over time the share market and other asset classes such as property will be supported given this differential in returns to what cash in the bank can generate.

It is also important to note that every year the rent form this property will grow whilst bank interest will only ever be what the rate of interest will be. All other things being equal - which income stream would you prefer for the next 20 years?

Probably the biggest misunderstanding I see with clients is the interaction of the share market and economic news.

The share market reacts to what it will think will happen in the next 6-12 months whilst most economic news tells you what happened in the last quarter.

The share market started to falter in October 2007, but especially in Australia we have only started seeing poor economic news in the last quarter. Quite a time difference. What happens is the share market anticipates this news and prices it in to the market.

The share market will also start to price in a recovery before it actually happens (in theory while it is happening) so by the time we get good economic news (which always lags) the share market has already priced that in.

What many clients don’t understand before we purchase shares for them is that they are actually buying part of a business. Over time, if the business they have invested in is profitable, the business will pay out dividends to investors and retain money to invest in the business to grow profit in future years. Here is an example:

Let’s start a company named ABC. You are there only shareholder who tipped in $100. Your share would be worth $100 and it would be backed by the cash in the company’s bank account.

ABC wants to start a business selling ‘widgets’. In the first year if ABC makes a 10% profit they will make $10. They may pay half as a dividend ($5) to the shareholder and retain the other half ($5) to grow the business. This means ABC will now have assets of $105 making your one share worth $105.

In their second year, if ABC make a 10% profit they will make $10.50 (10% of $105). They may pay half as a dividend ($5.25) to you, the shareholder, and retain the other half ($5.25) to grow the business. This means ABC will now have assets of $110.25, making your one share worth $110.25.

As you can see this process continues. This is how investors can get increasing dividends as well as capital growth over time by holding profitable companies.

Our office will be closed this coming Friday and Monday for the Easter long weekend.

Have a safe and relaxing weekend!

Rob

This week I wanted to write about an innovative solution for investors that need exposure to growth assets (to access a growing income stream), but are concerned by the ongoing volatility that we traditionally accept as part of the investment cycle.

A small annual fee can buy you a number of options in terms of protecting the value of your account balance. This is definitely of benefit for investors that need the extra level of comfort to ‘sleep at night’; however I don’t necessarily see this as a must for long term investors.

The view at Centre Capital is, that if by paying a small fee we are still achieving big picture what we need to do, then that will leave us in a better position than if we don’t do anything at all.

In the words of Wayne Bennett; “If you do what you have always done, you will have what you always had”.

That is it for another week. For those that need a laugh, click here for some 'new stock market terms'.

Just a reminder that we have our new Client Rewards program up and running; so make sure you get your entries in before 30 June to go in to ONE OF THREE draws to win a $300 gift voucher for Red Balloon Days.