Glennon Capital

Cash rates are at all time lows and predicted to move lower, while the yield on Australian 10 year government bonds hit an all time low of 2.2% this month. Australian savers, both within the superannuation system and outside it, are now faced with the tough task of building their savings nest eggs under much more difficult conditions. The result has been a search for income in stocks. Yield has been king. But in searching for fully franked yield in equities, investors can ignore important risks. Yield needs to be “real” and sustainable. Real yield comes from free cash flow. Free cash flow is the cash a business generates after accounting for capital expenditures required for the business to continue operating. Once a business generates free cash flow the board can choose to pay down debt, reinvest the money to fund future growth projects or acquisitions, buy back shares, or pay the cash to shareholders as a dividend. (VIEW LINK)


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