Income investors relying on ASX blue-chips have been under increasing pressure. However, another source of income has returned to the top end of the market. Speaking at a recent event held by IRESS and Livewire, Peter Gardner from Plato Investment Management identified a long-absent income opportunity back on the menu.
Peter Told the audience: “In terms of the gems that we see now in the market, it is in a place that people haven't really seen income from in the past… and they're sitting on fully franked yields of over 7% now.” In this short video, with transcript, he explains the market dynamics behind the return of this income from some of the biggest names on the Australian market.
In terms of the gems that we see now in the market, it is in a place that people haven't really seen income from in the past, and it's resources.
If you look at BHP and Rio, they're both sitting on fully franked yields of over 7% now. Rio has just done its second off-market buyback. BHP is doing a major off-market buyback now, as well as the big special dividend in January. The resource stocks are now on fairly healthy margins from where commodity prices are.
Iron ore prices really haven't fallen in the last six months, and given the Australian dollar has , that's just only improved their margins.
The resource companies aren't talking about investing anymore. Which is the most important thing. Generally, you don't want to invest in resource companies when they're doing major investments, because generally, they're not very good at it. If you look at Rio buying Alcan, or BHP buying shale oil in the U.S., they tend to overinvest, and that's when you don't want to be invested in them.
But when they're just sitting and doing their knitting, returning cash to shareholders, that's when resource companies generally do well, and that's at the moment the cycle that we're in".