High-yield stocks continue to outperform the greater market. Investors in some of Australia's biggest and brightest income stocks have realised huge profits over the last 18 to 24 months, but many experts expect share price gains to be difficult to come by going forward.
Investors are taking note of this and there are two trends that I believe have taken hold over the past six months;
- It appears that investors are becoming more comfortable investing in smaller companies that offer big yields; and
- Investors are becoming more comfortable investing in companies likely to benefit from a prolonged period of low interest rates.
Higher Inflation
Despite the Australian inflation reading coming in at an annualised pace of 3% recently, economists made reasonably insignificant changes to their interest rate forecasts. The result means that it'll be harder for the RBA to justify lowering rates to put downwards pressure on the Australian dollar, but also means that asset prices and Australia's economy should receive a boost.
If inflation increases above 3%, the RBA may be forced into increasing interest rates but the performance of some smaller real estate investment trusts (REITs) indicates that investors believe any movement will be minor.
Smashing the Market!
My justification for the two themes above is the outperformance of three of Australia's smaller REITs. All capitalised around the $1 billion mark, Abacus Property Group (ASX: ABP), Charter Hall Group (ASX: CHC), and BWP Trust (ASX: BWP) have all returned over 13% in the last six months, compared to just 6.5% for the ASX 200.
Big Yields
Not only have they smashed the market, but the companies still deliver healthy yields. In the 2015 financial year Abacus is forecast to yield 6.7%, Charter Hall 5.7% and BWP 6.1%. All three are forecast to increase the payout in the following two financial years too. An increase in interest rates could limit the payout and investor confidence in these stocks indicates that rates should stay low for longer.
Larger listed rivals are yielding between 5% and 6%, indicating that investors hunting for yield may be shifting towards smaller, and perhaps riskier, investments as larger dividend stocks become more expensive.
