High-yield shares put NZ in front

By Neville Bennett

Friday 1st November 2002

Dividends are a most important income stream for investors. New Zealand pampers the equity investor with taxation benefits: there are no capital gains taxes and there is an incredibly sensible imputation system, which, in effect, confers worthwhile tax-free benefits.

Some investors are not dividend-conscious. There has been a lot of talk about increasing asset values and ploughing back profits. Growth is trendy.

Be that as it may, investors might look for good dividends and capital gain. Ironically, some of the best dividend stocks also have yielded the best capital gains.

Dividends stocks have appreciated as the bear markets have brutally revealed the weakness of hothouse market favourites. Tech stocks have generally tanked. Therefore investors have gravitated to stable firms that are profitable and which also share their income with shareholders.

Some firms have a culture of paying out dividends; others seem to resent their shareholders and dole out miserly amounts of profit, often motivated by thoughts of the rating agencies' perception, rather than rewarding the risk takers.

Dividend stocks have also appreciated in value as interest rates have retreated. Low interest rates make dividend-paying stock more attractive than bank deposits and fixed interest.

It is important to realise the NZSE40 has held up well because it offers good value. It never had many wildly optimistic dotcom listings and had limited downsize potential. On the other hand, it lacks solid financial listings that might improve its dividends profile.

A glance at the NBR share table indicates New Zealand business is competitive and devoted to earning profits. My impression, without tediously counting every listing, is that half pay dividends. The NZSE40 is perhaps the strongest index in the world as its average market-weighted gross dividend is a staggering 5.75%.

A further glance down the dividend column substantiates these creditable yields. If we use global benchmarks and the CPI and take 3% as being a substantial yield, the investor can choose from 70 companies that pay 3%. The choice is almost embarrassing, as a 3% cutoff eliminates many excellent growth stocks, including INL, GPG and The Warehouse.

Nevertheless, the gross dividend column is more interesting for investors. This includes those valuable imputation credits. Again, a simple survey indicates a choice of 20 stocks yielding 9% plus.

The high fliers include:

* NZ Refining (19.5%),

* Capital Properties (11.3%),

* Horizon (11.1%),

* Kirkcaldies (10.1%),

* National Property (11%),

* PGG (11.7%),

* Renaissance (13.6%),

* Restaurant Brands (11.4%), and

* Wrightson (13%).

Interestingly, it would be erroneous to assume dividend stocks do not enjoy capital appreciation. The power sector has done well. For example, Powerco listed at $1.20c but is now worth $1.80 and has a gross yield of 9.6%.

Investors who bought high-yielding stock at their lows in 2001 would also have fared well. Cavalier had a low in 2001 of $4.12c but now sells for $6.40c and yields 7.8%. Restaurant Brands has moved from $1.26c to $1.63 (via $2.18c) and still yields 11.4%. The stellar performer is Steel & Tube, which has moved from a low of $1.41 to $3.14 and still yields 9%. Similarly, Sky City has gone from $4.06 to $7.63 and yields 7.4%.

My guess is interest rates will fall further in sympathy with US rates. If so, investors will have a marginally greater incentive to buy equities to reap good yields. Unless world stock indices melt, there is scope for further appreciation of high-yielding New Zealand equities.

The average market-weighted gross dividend for the NZSE40 is 5.7%. This is more than double the global average of 2.3%.

The global yield is actually quite high at present, matching the early 1990s. Dividents are likely to generate a greater percentage of total equity returns in today's low-interest environment.

Globally, yields diverge immensely across industries. Tobacco yields 6%, electricity 4.6%, banks 3.8%, oil 3%. Insurance, pharmaceuticals, media, autos, hotels, etc, all yield 2% or less. Many industries yield only 1%.

Even so, yields are not necessarily dependable. There are "reliability indices," which attempt to gauge the security of prospective dividend payments by measuring growth and volatility.

The most dependable industries are banking, oil and gas, defence, insurance and pharmaceuticals. The least reliable are construction and building materials, chemicals, steel, autos and electronics.

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