Despite a potential rise in United States interest rates on the horizon, income-orientated equity investors can still access a high level of income and return, but keeping a close watch on how any monetary policy tightening impacts on their SMSF is key.
“It’s important that all SMSF investors are aware of the impact of any future rate rises in the US, particularly any potential consequences for their portfolio,” SSGA Australia head of SPDR ETFs Shaun Parkin told selfmanagedsuper.
“For SMSF investors, the impact of a rate hike in the US depends on an individual’s retirement savings goals and an SMSF’s time horizon.
“Generally speaking, if an SMSF has many more accumulation years ahead, the greater the risks it can take.
“For similar reasons, the case for a global portfolio of relatively stable and defensive high-dividend stocks is more compelling.”
For all SMSFs, however, particularly those with less than 10 years until income was needed, diversification was key to retiring on time with sufficient funds saved, Parkin said.
“The SPDR S&P Global Dividend Fund is a globally diversified portfolio, with only about 22 per cent currently held in US stocks,” he said.
“Furthermore, it tracks the S&P Global Dividend Aristocrats Index and S&P’s unique methodology requires that all constituents have grown, or maintained, their dividends for at least 10 years.
“This means that despite a potential rise in US interest rates on the horizon, SMSFs can still access a high level of stable income and return.”
With only two Federal Reserve meetings left before the end of the year, investors across the globe were speculating about when the market should expect a rate hike in the US, he said.
“Although the market isn’t pricing a rate hike in November, the probability of a 25-basis-point increase in the Fed funds rate in December is nearing 70 per cent,” he noted.
“This will come as a relief to income-orientated investors and US dividend stocks can breathe again, at least until December.
“Of all the different ‘types’ of stocks, those that traditionally pay high dividends are perhaps the most sensitive to changes in interest rates.
“Real estate investment trusts, utilities and telecom companies tend to be more reliant on debt financing than companies in other sectors and can experience outsized moves in their stock prices around interest rate decisions.”
Additionally, when bond yields were low, income-oriented investors were attracted to the stable, high yield that companies in those sectors tended to generate, he noted.
“So as rates rise, the relative merits of these high-dividend sectors can change,” he said.
“With the chances of a rate hike in 2016 more than likely, is now a bad time to invest in these high-dividend sectors?
“Not necessarily, particularly for long-term investors.”
