As a generally high-dividend market, helped along by our dividend imputation system, Australian equities offer a good option for investors seeking a sustainable income stream, such as retirees. But not all dividends are the same.

Legg Mason Global Asset Management argues, in the third paper of a five-part series, called ‘Income Solutions for Life’, that investors should not only look at a company’s dividend policy, including the franking credits, but also assess likely future dividends.

“An equity strategy with an objective 
of delivering income should look very different to the Australian market index,” the paper says.

“It is not about ‘relative risk’ as it relates to portfolio deviations away from the index or the risk of underperforming the index or peers. It is the risk of not delivering a sustainable and growing income stream a company is paying today; it is also about what the company can pay tomorrow.”

As an example, the 12-month yield of the Legg Mason Martin Currie Australia Equity Income Trust, in the period to December last, was 6.51 per cent. This consisted of 4.88 per cent in distribution and 1.64 per cent in franking. The fully franked yield of S&P/ASX 200 stocks, by comparison, was 5.91 per cent (4.52 per cent distribution and 1.39 per cent franking) and term deposits yielded just 2.5 per cent distribution (no franking).

“In the current world of low interest rates the Australian equity market offers an attractive yield in comparison with other global equity markets and cash rates,” the paper says.

To see all the white papers in the series, go to: www.leggmason.com.au/income-solutions-for-life