Investment Opportunity in New Zealand - Why Are We So Lucky?
As interest rates have plummeted over the past 18 months, investors have scrambled to lock in long-term income streams. But as difficult as the low interest rates have been, New Zealand investors, compared to their counterparts in other developed countries, are still spoilt for choice when it comes to the opportunity for income investments.
New Zealand's wholesale deposit rates are more than three times as high as those in the northern hemisphere economies. In Britain and Europe three month rates sit around 1% when ours are over 3%. You have to feel for the Japanese and Americans who earn virtually nothing on their cash.
When you look at these low figures in places like Japan, it is little surprise that the Japanese see the opportunity to pour money into New Zealand investments via term deposits and bonds.
Longer term interest rates are also higher in New Zealand than elsewhere. We can actually receive relatively high rates by buying bank term deposits or corporate bonds rather than government bonds, but the difference in the level of interest rates across countries is roughly the same.
New Zealanders can earn 5.7% in 10 year government stock compared to around 3.5% that investors in Europe and North America earn on their government bonds. The long-suffering Japanese earn just 1.3% on their 10 year government bonds.
While the days of earning 10% 'risk free' from bank deposits and government stock are well and truly behind us, the interest rates on our fixed income investments are still higher than those available overseas.
Investors who want to earn more income than available from fixed options have to consider other, riskier, options such as shares and property.
Although capital gains get all the attention, income is also an important part of the total return from shares and property. A rental property opportunity provides income in the form of rent and shares provide income from dividends.
It is important to appreciate that this investment income can fall, or even disappear if things turn bad. If your tenant moves out of your property or goes broke, you won't receive rent. If the company that you buy stock from hits tough times it will make less money and might reduce its dividend. If it makes a loss it may even cut out its dividend altogether.
That said, growth investments can be very good income investments, especially because they have the potential to deliver growth in that income over time. For example, rents today are much higher than they were 20 years ago. Likewise, companies should be able to raise the price for their goods and services over time, leading to the opportunity for higher profits and dividends.
This potential for growth in income means property and shares offer better protection against inflation than fixed income.
The good news for New Zealand investors is that the shares on our sharemarket provide the highest average dividend yields in the developed world.
Some examples of Dividend yields on individual shares from some top companies in our market range from 4.8% to 7.5% Most companies make two dividend payments a year, and pay roughly half of the annual amount each time. Some companies make four payments a year.
New Zealand's wholesale deposit rates are more than three times as high as those in the northern hemisphere economies. In Britain and Europe three month rates sit around 1% when ours are over 3%. You have to feel for the Japanese and Americans who earn virtually nothing on their cash.
When you look at these low figures in places like Japan, it is little surprise that the Japanese see the opportunity to pour money into New Zealand investments via term deposits and bonds.
Longer term interest rates are also higher in New Zealand than elsewhere. We can actually receive relatively high rates by buying bank term deposits or corporate bonds rather than government bonds, but the difference in the level of interest rates across countries is roughly the same.
New Zealanders can earn 5.7% in 10 year government stock compared to around 3.5% that investors in Europe and North America earn on their government bonds. The long-suffering Japanese earn just 1.3% on their 10 year government bonds.
While the days of earning 10% 'risk free' from bank deposits and government stock are well and truly behind us, the interest rates on our fixed income investments are still higher than those available overseas.
Investors who want to earn more income than available from fixed options have to consider other, riskier, options such as shares and property.
Although capital gains get all the attention, income is also an important part of the total return from shares and property. A rental property opportunity provides income in the form of rent and shares provide income from dividends.
It is important to appreciate that this investment income can fall, or even disappear if things turn bad. If your tenant moves out of your property or goes broke, you won't receive rent. If the company that you buy stock from hits tough times it will make less money and might reduce its dividend. If it makes a loss it may even cut out its dividend altogether.
That said, growth investments can be very good income investments, especially because they have the potential to deliver growth in that income over time. For example, rents today are much higher than they were 20 years ago. Likewise, companies should be able to raise the price for their goods and services over time, leading to the opportunity for higher profits and dividends.
This potential for growth in income means property and shares offer better protection against inflation than fixed income.
The good news for New Zealand investors is that the shares on our sharemarket provide the highest average dividend yields in the developed world.
Some examples of Dividend yields on individual shares from some top companies in our market range from 4.8% to 7.5% Most companies make two dividend payments a year, and pay roughly half of the annual amount each time. Some companies make four payments a year.