Rising
interest rates no match
for
share income
...
ROTHSCHILD
REPORT NO.15
With interest rates on the rise, investments like "safe" term deposits
may seem appealing. However, there are some things to consider.
There
is an alternative to term deposits that may offer a similar income
stream, with the potential to also generate good capital growth -
shares.
While term deposits offer security and a consistent income stream,
there are disadvantages. After reaching the dizzy heights of 20% pa
returns in the early 1990's, interest rates paid on term deposits
have since fallen dramatically. It is unlikely that modest rate increases
will return interest rates to their glory days in a hurry.
In addition, term deposits do not provide any capital growth. If you
are investing for income, perhaps this is not a major concern, but
it is worth considering. Assume you invested $200,000 in a term deposit
in 1991. Over the eight years to the end of 1998, you would have received
an income of $132,600 and got your investment of $200,000 back. If
you had invested the same amount in the Australian sharemarket, you
would have received a higher income of $197,000. In addition, your
original investment would have grown to $439,660 (based on the All
Ordinaries).
When looking for income producing investments, you may have shied
away from shares in the past because of their perceived 'risk'. Certainly
shares are a long-term investment; there may be periods of negative
returns, but over the long term the impact can be significantly reduced.
In income terms, risk could also be seen as the potential for your
income to reduce in value over time. Alternatively, it could be the
risk that you don't receive the income level you were expecting, or
that your payments are not made on time.
These risks can be addressed by considering the many advantages of
share investing. Some companies focus their attention on producing
a good return for their investors. Rather than reinvesting profits
into the maintenance of the company, they have structured their businesses
so that they can pay dividends to their investors. These companies
usually have a large 'start up' cost, but once established, run at
a tidy profit. The result of investing in a company with this focus
is the competitive income stream that you receive.
Another
advantage of some shares, is the company's ability to increase the
level of dividends it pays to investors. This trend of a growing income
means that there is less risk that your income won't keep up with
inflation. It is an investment you can make now that should ensure
your income keeps up with your future lifestyle.
There
are also the tax benefits of shares. With term deposits, you pay your
marginal tax rate on any income you receive. While the same is true
for shares, as part of your dividends you receive tax credits which
can help reduce the tax you pay. If you receive fully franked dividends,
on an after tax basis, your term deposit would have to return almost
double the return of your share dividends to keep up.
While
there is safety in term deposits, there is also an opportunity cost.
Over the long term, shares may offer better returns. The right shares
can also provide you with a competitive, tax-effective income stream.
Rothschild
launched the Five Arrows Share Income Fund in 1998 and it has proved
popular for investors looking for value beyond term deposits. This
Fund invests primarily in Australian shares and listed property trusts,
and aims to pay a growing, tax-effective income stream to investors.
The Rothschild Share Income Wholesale Trust is available to investors
with $100,000 or more to invest.
For
information about Rothschild, please contact your financial planner
or Rothschild on 1300
65 65 68
between 8.00am and 7.00pm (Sydney time), Monday
to Friday.
or visit our website at www.rothschild.com.au
or
Email: raam.enquiries@rothschild.com.au
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Disclaimer
* Investment in the Five Arrows Share Income Fund or Rothschild Share
Income Wholesale Trust may only be made on the application form attached
to the current prospectus, dated 27 March 2000 and 15 October 1999,
respectively, which have been lodged with ASIC and are available from
the Manager, Rothschild Australia Asset Management Limited (RAAM)
(ABN 22 000 727 659). The repayment of capital and the performance
of the funds are not guaranteed by RAAM or any other party. Past performance
is not necessarily a guide to future performance.
The information is based on Government laws and regulations current
at time of issue (September 2000). This information is not intended
to be relied upon for the purpose of making an investment decision.
This material provides general information only and does not constitute
financial advice or a recommendation in respect of any Rothschild
product and should not be relied upon as such. The material is made
available in good faith by Rothschild and has been derived from sources
believed to be reliable and accurate. However, it is not intended
to be a complete description of the matters described and Rothschild
assumes no responsibility for updating any information contained in
this material or for correcting any error or omission which may become
apparent after the material appears on the Internet. Copyright in
the material reproduced on these pages is owned by Rothschild. Except
to the extent otherwise permitted by the Copyright Act 1968 (Cth),
the material may not otherwise be reproduced or displayed in public
and may not be distributed or transmitted electronically to any other
person or incorporated by any means into another document or material,
including other websites. Without limiting the generality of the foregoing,
Rothschild does not permit reproductions of its material in other
websites in conjunction with advertising, trade marks, logos or material
of other financial planners or competitors in circumstances when it
has not given its prior written consent.
Investments in the funds are not deposits with or other liabilities
of NM Rothschild & Sons (Australia) Limited (ACN 008 458 366) or of
any other company in the Rothschild Group, and are subject to investment
risk, including possible delays in repayment or loss of income or
capital invested. Neither the repayment of capital nor the investment
performance of the funds is guaranteed by NM Rothschild & Sons (Australia)
Limited, the Trustee or the other companies in the Rothschild Group.
AFSD
Disclaimer Notice
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