Div. Yields Rival Fixed Interest

Press, Volume CVI, Issue 31323, 20 March 1967, Page 17

Div. Yields Rival Fixed Interest

New Zealand’s present depressed economic psychosis may be causing headaches for some but for those with money for investment in equity stocks and debentures the field has never been better.

Fixed-term interest rates have grown steadily in the last year and a half and if at first they have outstripped the improvements in dividend yields, the rapid decline in share prices so far this year has largely nullified these gains.

Dividend yields now rival those offering 1 in the fixed interest field.

Last week, there were 21 companies whose shares were returning 8 per cent and higher on current dividends, 37 returning 7 per cent or higher and 60 returning between 6 and 7 per cent. On the other hand, interest rates on debentures announced this year have ranged from 6| per cent for the fiveyear terms to 71 and 9 per cent for the 15-year and 'higher terms. For those wishing a steady income, the problem arises, which to invest in, fixed term or equity stock? There are advantages and disadvantages in each alternative, which must be weighed before a decision can be made.

Security The first point is obviously security. In this respect, fixed term investments, in the usual form of debentures, are a high form of security, compared with equity stocks. Profits usually determine the size of dividends but with debentures the company has a contractual liability to pay the interest rate as set in the prospectus. • In the event of winding-up debentures have priority over most forms of debts and in repayment of capital. Taxation From the point of taxation, dividends have a decided advantage if the holdings of the investor are large and his income from other sources small.

Taxation on dividends rises to a maximum of 7s in the £ and interest after the first £3O is exempted, is treated as assessable income. The tax on this can rise to the maximum of 13s 6d in the £ on an income of £3600.

Because of the big difference of circumstances of each taxpayer and the number of exemptions such as life in-surance-available, it is impossible to give a table showing at what rate an investor would gain if he received dividends and not interest payments.

For the small investor, there would be little advantage as the income at which the rate of 7s in the £ applies is £1395 (5s 7d tax, Is 6d social security). As well as this, the exemption of the first £3O of interest for both tax and social security would postpone the tax advantage to be gained from dividends.

Capital Gain Where the small investor can gain, however, is in the prospects of capital gain. Apart from share price appreciation, these gains can be made from bonus issues, cash issues at a small and generous premium (as with the recent issue by Rothmans), or at par when the shares are selling at a premium (Canterbury Frozen Meat), and also by other methods peculiar to shares, such as take-over bids. The likelihood of these at the moment are greater perhaps than the possibility of

a rise in share prices, which rely as much on the optimism of the business sector as on company results.

Most who seek incomes from dividends, rather than capital gains, tend to hold their shares for longer periods, which would possibly take them through this falling period. Capital gain for fixed-term investors is given little consideration. For one thing, most investors have no desire to sell their debentures before the repayment date. 1 Discount If they did. then it is likely that they would have to do so at a discount, because of the rise in interest rates. Unlike share issues, most of the debenture issues are made to the public. Companies cannot rely on the public's loyalty to their firm to fill their issues, although reputations (as is the case with J. Wattie) can help. With the intensification of the credit squeeze last year and the cautious approach by investors, this meant that companies had to bid more for less money, a factor leading to the higher interest rates. Also, with this rise, many Investors held off because by doing so they could get a higher return at a later date. Thus to give a comparable return, debentures issued in a time of lower rates must sell at a discount to be as attractive as those currently being offered, even allowing for the shortened maturity date. Lower Price An example of this is New Zealand Farmers’ Co-oper-ative’s debentures, which mature in 1970 and have an interest rate of 5J per cent. This time last year they sold at £94 17s 6d to yield 6.1 per cent. On Friday and a year nearer to the maturity date, they sold for £92 7s 6d to yield 6.2 per cent. It would seem that the present high dividend yields would make shares attractive to those prepared to hold them for a medium to long period. Debentures would suit an investor whose primary concern is steady income from a safe source. Overseas Shares February brought a flurry of sales in sterling area securities, according to the Reserve Bank last week. In 674 sales notified to the bank, about 202,000 shares changed hands, bringing the total number of sales since the limited market began operating on October 3 to 1847, involving 480,000 shares.

This sudden increase in sales activity—which is almost double the numbers sold in the previous four months —seems to have its origin in the policy to abolish the noremittance scheme for new cars. As from February 10, all applicants for private noremittance licences have had to bring back through the banking system funds equivalent to 15 per cent of the value of the licences. This will be increased to 30 per cent for both private and commercial no - remittance licences from July 1 of next year. Abolition The Government has said that it intends increasing the proportion of funds to be repatriated through the bank-

ing system each year, until the scheme is eventually abolished. Another incentive to import cars now is the possibility of an increase in sales tax once Parliament meets on April 26.