Why dividends make sense in an inflationary environment.

The fallout from Covid-19 put pressure on corporate dividend payments in many sectors and markets. Now, as economies recover and earnings bounce back, dividends worldwide are poised to rebound. At the same time, while widespread fiscal stimulus may push the global economy into a period of higher inflation, history shows how dividend-focused investment strategies can provide sustainable income in a reflationary environment.

At the height of pandemic-induced uncertainty in the markets last year, many companies came under economic or political pressures to cut or suspend dividends. Dividends declined by around 3 per cent across the S&P 500 Index in the US and fell further in Europe.

As a response to the pandemic, economic policymakers have cut interest rates and formulated massive fiscal stimulus programs – including a historic US$1.9 trillion recent stimulus package in the US alone, with potentially more on the way. Such a massive and coordinated policy response has increased expectations that the economy will enter a period of higher inflation.

This week’s Chart Room looks at the long-term relationship between dividends and inflation. Periods of inflation can be challenging for income-seeking investors, as inflation eats into the real purchasing power of bond coupons, which are generally fixed at a certain level. By contrast, dividends are a share of the corporate profit pool, and so when profits are rising, they can rise too. This growth means they can increase in line with, or ahead of, inflation, protecting the real purchasing power of these income streams. Since 1900, the 10-year annualised growth in dividends across the S&P 500 has outpaced CPI growth nearly three-quarters (73 per cent) of the time.

The market’s recent focus on themes like ‘stay at home’ and, more recently, ‘reopening and reflation’ has seen many stocks which don’t fit into these buckets falling out of favour. We think this is particularly true in defensive sectors like consumer staples, utilities and healthcare, where some high-quality companies with good dividend prospects now look undervalued. For income-focused investors, that means it’s a great time to take the long view.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article source: https://www.fidelity.com.au/insights/investment-articles/why-dividends-make-sense-in-an-inflationary-environment/

Don’t forget about Estate Planning

“You only live twice. Once when you are born. And once when you look death in the face.” So said Ian Fleming, author of James Bond novels.

It’s also a good way to think about estate planning. Many of us, naturally, put off thinking about our own mortality. But estate planning – legally laying out what happens to your assets after you’ve gone – can free you up to get on with life. Because you’ve done what you can to look after those you care about.

The fundamentals of estate planning.

  • A valid will

A will sets out your wishes as to what happens to your assets when you’re gone. If you have assets – and people you care about – you should have a will.

A solicitor can help you draft a will. It’s cheaper to do it yourself via a will kit, but as the NSW Trustee and Guardian1 points out below, poor drafting of a will can tie up your estate in legal complexities and disputes. That can cause real pain and suffering for your family.


You may be surprised to learn that your super can’t be ‘managed’ by your will, or at least by your will alone. That’s because it’s held in trust in your superannuation fund and in legal terms, it’s your super fund trustee who decides how it’s disposed of upon your death.

However, you can help ensure that it goes to the people you want to give it to by creating a Binding Death Benefit Nomination through your super fund and so directing your super fund to pay your super to a specific person, or into your estate on your death. At that point, your will can determine how your super is disposed of.

As you can see, this is a more complex area than many people expect – so talk to your accountant, a financial adviser, and your super fund.

Powers of Attorney

According to the Australian Bureau of Statistics2 12.6% of people who live to 85 or over have Dementia/Alzheimer’s as their main long-term health condition.

That’s a reminder that for many of us there will come a time when we have difficulty making decisions about our own health or finances. A legal instrument called a power of attorney can help ensure that someone with your best interests at heart can make those decisions on your behalf.

There are different types of powers of attorney and they vary by jurisdiction within Australia. These are challenging ideas to contemplate but having the appropriate legal structures in place can provide peace of mind.

Powers of attorney can also ensure that someone who cares about you has the legal right to make important (sometime life-saving) medical decisions on your behalf.

Bottom line: don’t leave a mess behind

Wills, super and Powers of Attorney are just some elements of a good estate plan. You might need a family trust to ‘own’ and control some of your assets. These vehicles can have tax and asset protection benefits.

The bottom line though is that once you have a reasonable level of assets, you should start thinking about your estate planning.

Thinking about your own death or disability may not be fun. But ensuring your loved ones are cared for and your assets are disposed of in accordance with your wishes – is something you should do now. Calmly, rationally, in consultation with your family and with the help of a financial adviser, accountant and solicitor.

The alternative – leaving these big decisions to your family who may be unfamiliar with the law and dealing with grief – is something you wouldn’t want to leave to anyone.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article source: https://www.mlc.com.au/personal/blog/2021/06/dont_leave_a_mess_behind

Interest rates – accentuating the negative

So it’s just a normal day. You walk into the bank, deposit some money. And the teller asks you to pay them interest. Keeping your cool, you ask why. And the teller apologetically explains: “Oh we’ve got negative interest rates.”

Right now, we’re living in a world where some countries have ‘negative interest rates.’ That means, that instead of rewarding customers for depositing money, a bank (or a central bank) will charge them interest. In financial terms, that’s the world turned upside down.

So how did we get here?

The GFC hangover and COVID-19

Broadly speaking, negative interest rates are engineered by governments and central banks as a way of getting life into a chronically spluttering economy. If it costs you money to put your money in the banks (or it costs banks money to park their funds with the Government) there’s more incentive for individuals to spend it on housing, at the shops, or on holidays. And for banks to invest it in areas that also foster more economic activity and employment – like lending to business.

There’s no coincidence we’re talking about negative interest rates in 2021. They were part of a suite of measures used by some countries to try and get out of the economic slump caused by the Global Financial Crisis back in 2008/09. The economic shock administered by COVID-19 has brought them back into fashion – countries as advanced as Japan, Switzerland and Sweden have jumped on the negative interest rate train.

Australia stays positive

So what do negative rates mean for you? The good news is that they’re not really happening in Australia. At least not yet. And they probably won’t.

Back in November 2020, the Reserve Bank of Australia (RBA) Governor Dr Philip Lowe said: “There has been no change to the Board’s view that there is little to be gained from lowering the policy rate into negative territory.”

Given that the Australian economy has picked up sharply since then – house prices and employment numbers are on the upswing – there seems less need for negative interest rates in Australia than most other countries.

Different folks

But, while not negative, interest rates in Australia are still at historic lows – and could stay that way till around 2024 according to Dr Lowe and his team at the RBA. This has implications for everyone – but different implications depending on whether you’re a saver or a borrower.

  • If you’re a saver or retired, low interest rates make it harder to earn the income you used to from products like Cash Management Trusts and Term Deposits. You might find you are considering investing in riskier assets, like shares, to try to make up that income.
  • If you have large debts – like a mortgage – your interest payments are likely significantly lower. And if you’re looking to borrow, it’s possible you can borrow more money, because your repayments will likely to be much lower.

What goes down must come up

As mentioned earlier, these low interest rates are a symptom of a global economy trying to get itself going again.  They’re not normal (though they might feel like the new normal). That means it could make sense to get good advice about how to handle this economic trend – to look out a bit longer than the next three years.

Here’s how good advice could help:

  • Savers: A financial planner can help you find sources of extra income without taking on too much risk to do it.
  • Borrowers: Some expert advice could help you ensure you don’t overcommit when it comes to borrowing. As the popular US financial planning radio star Dave Ramsey puts it, “A lower interest rate doesn’t make a debt go away.”

Bottom line: look past today’s trend

Low and negative rates are likely to be with us for some time. But for Australian savers, borrowers and investors, it’s important to look beyond the obvious, front page economic headlines.

good financial planner can ensure you aren’t carried away by the latest news and forget your long-term plans.

After all, the COVID crisis is just a year old – and already people are talking about a potential post-COVID boom. Things go down – and up again – and down again. Just like interest rates.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article source: https://www.mlc.com.au/personal/blog/2021/06/interest-rates-accentuating-the-negative