It’s one of New Zealand’s favoured investments for retirement.
Buy a rental property or two. Reduce or pay off the mortgages. Enjoy an income stream and endless capital growth.
As an analyst, I’ve struggled for a long time to see meaningful return from this scenario. Unless you’re able to develop the land and create much more value.
So, I was unsurprised to see other analysts in the media start highlighting the same thing. This by property editor Greg Ninness last month:
‘Although the yields are improving, in most cases they would probably still be too low to provide investors with a reasonable income stream.’
His analysis suggests the average two-bedroom property rented out in New Zealand would only generate a profit of around $4,300 over a year. And that excludes any allowance for vacancy or maintenance.
It also excludes the time and stress of managing what is essentially a small business housing persons of variable reliability. Not to mention unexpected situations.
In my last two rentals, I had to deal with the damage and blood of a botched burglary. Then a situation where police would not attend a North Shore street unarmed. Both were in supposedly ‘good’ areas.
My first rental property in Royal Oak, Auckland. Source: Author
Well, property is a long-term investment.
The situation we are in at the moment also sees some of the highest interest rates since the GFC.
Fixed interest investments are another option. They offer preservation of capital, typically very low risk — and right now, rates as high as 6% for 1 year.
Of course, the real risk is continued inflation.
If you have $1,000,000 in a term deposit and receive $60,000 in gross interest, that is not the whole story. If inflation continues at 7%, you’re in fact left with $930,000 — plus your interest after tax — which still would still leave you financially degraded.
Then there is the opportunity cost. If you lock up money for a year, you can’t put it into potential growth assets.
So, if direct property is fraught for mum-and-dad investors — and fixed interest faces severe headwinds — are there opportunities in stocks to generate strong yield with the prospect of some growth?
The answer is yes.
But it’s difficult to find quality businesses with both income and upside. And it’s difficult for many to manage the psychology of a position that will both rise and fall in value.
Conventional wisdom says that to get a large dividend, you tend to have to forego growth in the share price.
The question, then, is does the market sometimes overlook positions that offer outsized income and potential growth?
In this market cycle, that’s probable.
Let’s take a look at 13 companies on the New Zealand Stock Exchange…
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