Positive gearing with listed investments
Our Bite-Size Strategies series provide you with some easy to apply ideas you can share with your clients.
As you know, positive gearing is a common gearing strategy used by investors across various asset groups. The term is used to describe an investment that generates an income (or yield) greater than the interest expense of the loan used to purchase that asset.
The idea is that if the income is greater than the interest rate, investors are able to hold the asset without having the interest being a constraint on their cash flow. This means that investors are able to hold positively geared assets for a longer period of time as they wait for growth in the underlying asset.
Many property investors spend a lot of time looking for a positively geared property, but it can be difficult to search for up to date data or the yield on unlisted assets.
The recent rise in residential property prices has also been greater than rental yields, making it even harder to find positively geared property.
If your clients are looking to borrow to invest in a positively geared asset, they could consider listed investments. The rise of exchange traded funds means holding a diversified portfolio of high yielding securities is easier than ever.
Examples of high yielding ETFs include –
- UBS IQ Morningstar Australia Dividend Yield ETF (DIV)
- Russell High Dividend Australian Shares ETF (RDV)
- iShares S&P/ASX High Dividend (IHD)
- State Street SPDR MSCI Australia Select High Dividend Yield ETF (SYI)
- Vanguard Australian Shares High Yield ETF (VHY)
Each ETF has a different stock picking methodology, varying fees and yields, and clients should choose a profile that suits their own strategy. Another benefit of holding a diversified high yielding ETF, rather than individual high yield shares is that it reduces the potential risks associated with a single shareholding.
ETFs are also a great way to add diversification to an existing portfolio, funds such as the SPDR S&P Global Dividend fund (WDIV) help give investors exposure to global shares with a sustainable dividend. For more on diversification through ETFs click here.
Considering dividends are generally paid biannually or quarterly, some investors choose to capitalise their interest to their loan and then pay down the loan when the dividend is paid. Investors should seek professional advice to determine if this approach is right for them.
It’s important to remember that with greater returns comes greater risks. While high yielding ETFs offer a convenient way to help investors cover the interest expense of borrowing to invest - it is important not to rely on dividends alone to cover potential expenses, and consider the potential for interest rate rises in the future as well as dividend cuts.
To find out more about how a margin loan can help your clients build wealth and achieve their financial goals, please contact your Relationship Manager or call Leveraged on 1300 307 807.
Issued by Leveraged Equities Limited (ABN 26 01 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). This information is correct as at 29/10/17 and is for general information purposes only. It is intended for AFS Licence Holders or authorised representatives of AFS Licence Holders only. It is not to be distributed or provided to any other person.