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EIGA: Financial Year 2019 notes from the Portfolio Manager

30 June marked the end of the 2019 financial year and what a good year for generating income from the stockmarket it was for us! While Australian companies have traditionally been generous dividend-payers relative to most overseas markets, this was a step up in the year just gone.

The catalyst was the prospect of a Labor election victory, which would have resulted in investors losing the ability to claim back surplus franking credits from the 2020 financial year. This led many companies to return accumulated franking credits to shareholders prior to year-end, either by lifting their dividend levels, paying one-off special dividends or undertaking off-market buybacks.

30 June also marked the end of EIGA’s first full financial year of operation, having listing in May 2018. The Fund aims to generate an attractive level of tax-effective income, paid via monthly distributions. In particular, it aims to provide an income yield, including franking credits above that of the overall market. With this in mind, for the financial year just gone, we targeted an income yield of 7%, comprising a 5% cash yield plus 2% in franking credits.

However, on top of our initial expectations, the fund benefited from receiving these special or increased dividends from many companies and also participated in several off-market buy-backs, from companies such as BHP, Rio Tinto and Caltex.  The reason for participating in these off-market buy-backs was that, when you factor in the franking credits received, they generated a positive after-tax return for investors on lower marginal tax rates.

As a result, the actual level of income generated by the fund was significantly higher than our target – being 17.5%, comprising 12.0% cash yield plus 5.5% in franking credits. Whilst, this is a pleasing windfall for investors in the year just gone, the election outcome means franking credit refunds are safe and companies are unlikely to undertake the same level of buy-back activity or special dividends going forward.

For the coming financial year, we are again targeting an income yield of around 7%, comprising 5% cash distributions, paid in equal monthly instalments plus 2% in franking credits.

In the current environment of very low – and likely going even lower – interest rates, the Fund can make a valuable contribution to an investor’s income generating portfolio, providing a compelling level of income relative to many alternative investment opportunities as shown below:

 

By Stephen Bruce, Portfolio Manager, eInvest Income Generator fund (managed fund) (ASX:EIGA)

To read more about eInvest Income Generator Fund (Managed Fund) ASX: EIGA, click here.

Past performance is not a reliable indicator of future performance. Please read the PDS prior to investing. This information is general in nature and is subject to the terms and conditions outlined here.