Remember your student days? Young and poor, but happy.

At the age of 18, I left Taranaki and moved to Auckland to study. I had $10,000 in savings from odd jobs through high school. A small parcel of shares. And a 1967 VW Beetle with bad brakes.

Fees were $2,000 a year. Board was $140 a week. Then there were books, beer, and all the other costs that make up any life in the big town.

And you realise you’re sitting on a time bomb.

Your money will run out. When it runs out, you’ll need a student loan. Then your future income will reduce with the load of debt repayments. And it’ll be even harder to enter the housing market.

Fortunately, studying economics, I could see the workings of the bomb.

New Zealanders want to catch up with Australia on the income front. It was worse back then. We’ve made gains on the average salary front. But for real wealth in the economy available for each person to capture, look at GDP per capita in 2017:

Australia:             US$53,800

New Zealand:    US$42,940

From 1990s until now, our government’s solution was to out-migrate Australia, running migration at twice their level (per capita). And to inject the economy with foreign money, selling our housing and land assets offshore at a fast clip.

This was never going to be sustainable.

For a business student like me in the late 1990s, the only solution was to grow income. And that’s what I did, first utilising Student Job Search and then running a tutoring business.

As the income started to grow, I realised something important.

Studying full-time and working nights and weekends didn’t leave much room for a life. I had to get my money working for me.

That’s when I discovered the power of passive income

In a fast-growing sharemarket, I could grow my capital at least 10% a year while enjoying dividends of 6%+ per annum.

In my small business, by employing tutors, I could earn a margin on their time rather than taking all the lessons myself.

And through buying a small house, I could rent out the rooms and have the mortgage paid.

But it was a bit easier back then because asset prices had not yet inflated so much.

Low interest rates

One of the reasons shares and property have boomed is due to the new approach in monetary policy since the global financial crisis of 2008.

In addition to high rates of migration, central banks in developed countries like NZ have run low interest rate environments. Low interest rates are meant to stimulate economic growth by making it cheaper to borrow money to finance investment.

The approach penalises savers in the bank but rewards the owners of physical and financial assets.

We’ve had a bull run in stocks (and property) since 2009, partly because you can’t get a decent yield from savings or bonds.

Last year, when I was talking to people about stocks, they kept saying to me, ‘I wouldn’t get in now, prices are way too high,’ or ‘We’re due for a crash,’ or ‘There has to be a correction anytime now.’

What these people failed to understand is that the developed world is now addicted to cheap money. When the economy shows the faintest sign of weakening, monetary authorities prop it up by cutting rates — or at least threatening to do so. [openx slug=inpost]

The global hunt for yield

They also failed to consider that people need to earn a return on their money out there. There’s a fierce, global hunt for yield going on. They missed the opportunity lying in the fact that there are still value stocks in the market. And the missed capturing the swift gains that have started to move the markets this year.

Those who kept their money in term deposits have gone backwards. Those who bought shares have notched up gains.

In Switzerland, the highest interest rate you may find on a bank term deposit right now is 0.53% per annum. Here in NZ, about 3.40%.

But with the Reserve Bank hinting at a potential rate cut in May, those term deposit rates could come down to the low 3% or worse. Kiwibank economists have put a 40% chance that the OCR could be down at 0.75% in 2020. If that comes to pass, term deposit rates could fall as low as 1–2%. And the Kiwi dollar would tumble, making entry into global markets a lot trickier.

Finding high yield

The NZX has a good number of very high-yield stocks.

Despite cuts to the dividend, NZME [NZX:NZM] has distributed a gross yield of just under 20% per annum at the current share price. Of course, this could come down as the company continues to grapple with the decline of print readership. For this reason, it’s one of the few stocks that have not accelerated away with the yield panic. At time of writing, it’s on the market for $0.56 a share with a PE of less than 10.

Spark [NZX:SPK] may present an opportunity. It had previously enjoyed the same acceleration with the rest of the market, reaching $4.15 earlier this year. Recent leadership changes and a profit dip blamed on the Southern Cross Cable have pulled the stock down to $3.65. It’s not cheap for a telco, with a PE of around 18 (compare Australia’s Telstra [ASX:TLS] at 11), but the dividend has been stable and is damned attractive: Gross yield of 8.85% at the current price.

As for the high-yielding electric utilities, these have accelerated away to reach surprising highs. Which demonstrates again that the hunt for yield is real. If you want yield on top of a high-quality business, you’re going to have to pay for it, because you aren’t going to get it anywhere else.

The key is getting into great strong-yield businesses early. Before the share price takes off. Then you get income and growth. And your passive income can really make a difference.

Regards,

Simon Angelo
Analyst, Money Morning New Zealand

Important disclosures

Simon Angelo owns shares in NZME [NZX:NZM], Spark [NZX:SPK] and Telstra [ASX:TLS] via share broker Vistafolio.