Income investors will have a tougher time in 2014. A steady official cash rate for most of this year, despite firming inflation, will reduce real returns from term deposits. And popular dividend stocks, such as the Big Four banks and Telstra, look fully priced after stellar gains last year.
As a result, investors will have to look beyond the obvious income stocks and take slightly higher risk to maintain yields above 6%. One option is mid-cap stocks that are reasonably priced and offer sustainable yield.
Conservative investors, of course, should stick to blue chips for dividend yield. Those who can tolerate a bit more risk, and are willing to venture beyond the ASX 100, will find mid-cap stocks are not always only about growth. Some provide a useful mix of income and growth for self managed super funds.
I use four main criteria for choosing a mid-cap income stock: it must be reasonably priced, have reliable and secure cash flows, relatively low debt, and good management. These trusts and stocks fit the bill:
1. Shopping Centres Australasia Property Group (SCP)
The Woolworths spin-off was 2012’s largest float, raising $472 million at $1.40 a unit. It owns 72 neighbourhood and regional shopping centres and counts Woolworths as a key anchor tenant. SCP’s exposure to non-discretionary retail is about as defensive as it gets in mid-cap land.
After hitting a 52-week high of $1.85, SCP has eased to $1.50, offering a forecast yield of 7.2% in FY14, based on consensus analyst forecasts. The net tangible asset per unit at 30 June 2013 was $1.57 and SCP’s gearing was 28.9%.
Longer term, SCP should benefit from continued population growth, consolidation of a fragmented convenience-based retail shopping centre market, and rental growth.
2. BWP Trust (BWP)
Australia’s only specialist provider of bulk-goods retail property is trading slightly below FN Arena’s consensus target price of $2.33. At $2.29, it offers a prospective dividend yield of about 6.5%, according to analyst forecasts.
Like SCA, BWP Trust depends heavily on a retailing gorilla, in its case Wesfarmers’ high-performing Bunnings hardware warehouse chain. BWP provides exposure to the improving hardware and renovations market, without the risk of buying fully-priced housing or building materials stocks.
It is not the cheapest stock on this list, trading at a premium to its $1.93 net tangible asset backing per unit. It would be more attractive close to $2. But a solid record and the potential to grow distributions faster than inflation this decade make BWP a worthy consideration for an SMSF.
3. Charter Hall Retail REIT (CQR)
This real estate investment trust (REIT) provides a foot in both retail camps: about half its earnings come from renting supermarket space to Woolworths and Wesfarmers, and the other half from speciality retailers that mostly sell everyday items, making this REIT reasonably defensive.
At $3.64, Charter Hall Retail REIT (CQR) offers a forecast yield of 7.5%, according to consensus analyst forecasts. It is off its $4.49 peak last year and trading closer to the 52-week low of $3.50.
Like BWP, Charter Hall is trading at a premium to its last stated net tangible asset backing ($3.32 per unit). It may have less potential for short-term capital growth, but a reliable distribution and good long-term prospects should suit long-term SMSF investors.
4. Australian Leaders Fund (ALF)
Finding value in Listed Investment Companies (LICs) has become harder after the sector’s rally last year. Fewer trade at a discount to their pre-tax net tangible assets, as wealth advisers increasingly recognise the benefits of including low-cost LICs with high, reliable dividends in an SMSF (See our update on WAM Capital).
For example, Djerriwarrh Investments trades at a 27% premium to its December 2013 pre-tax NTA, and Mirrabooka Investments is at 21%, such is their long-term performance.
I prefer buying high-quality LICs at a discount or near parity to pre-tax NTA. But it can still make sense for long-term investors to pay a slight premium to access reliable, fully-franked dividend yields from LICs run by well-regarded managers.
At $1.67, Australian Leaders Fund trades at a 9% premium, based on its latest stated NTA. It invests in undervalued shares and, at current prices, provides a 7.1% fully franked dividend yield. After outperforming the ASX 200 index over five years, ALF deserves to trade at a slight premium to NTA.
Unlike many LICs, ALF’s mandate allows it to short-sell stocks it believes are overpriced and, unlike exchange-traded funds, it is very much an active manager. It deserves a spot on watch lists in anticipation of improving value, and would be more interesting below $1.60.
Tony Featherstone is a former managing editor of BRW and Shares magazines.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: UK becomes tailwind for NAB
- Ron Bewley: Aurizon, Asciano and Transurban still industrial sector favourites
- Penny Pryor: Buy, Sell, Hold – what the brokers say
- Tony Negline: What you can and can’t do with property in your SMSF
- Questions of the Week: The question of timing