Could Challenger Ltd (ASX: CGF) be a retiree's dream for income with its reliable grossed-up dividend yield of 5.7%?
Challenger is Australia's market-leading annuity business. It has such attractive products that plenty of other financial institutions and superannuation funds just re-label a Challenger annuity as their own.
As a person that thinks shares are the best asset, I think it could be an idea to consider investing in Challenger shares over actually investing in an annuity because of the higher growth potential and better income yield.
Challenger has maintained or grown its dividend every year since 2005. It has provided the same sort of income consistency as an annuity, although dividends are certainly not guaranteed.
There is an enormous amount of money that is building up in Australia's superannuation system. A growing amount of money is shifting from the accumulation phase to the retirement phase which will hopefully be very beneficial for Challenger's assets under management (AUM) which is now up to $84 billion.
The number of people aged over 65 is expected to grow by 32% over the next 10 years and 56% over the next 20 years.
As long as Challenger's AUM keeps rising it will mean higher revenue for Challenger which should lead to higher profit for Challenger.
However, there are two big elements that will affect Challenger's long-term performance. Changes in the interest rate could be positive or negative for both the demand & performance of its products. Challenger's investments need to deliver sold returns so that Challenger can afford to pay the annuities and make a profit for shareholders.
Foolish takeaway
Challenger is trading at 15x FY20's estimated earnings. Over the past six months the Challenger share price has gone up 25%. It's still trading at a decent price, though the easy money has been made after the share price drop in 2018 and 2019. Challenger could be a decent idea for consistent dividends, I'd prefer it to the big four ASX banks.
