GENERATE INCOME

SHARES
GENERATE
INCOME.

INTRODUCTION
We continue to live in an ultra-low interest rate environment, with Central Banks in developed
countries continuing to play an unprecedented role in stimulating economic growth through
quantitative easing and monetary policy measures.
This trend of Central Bank involvement has continued in Australia with the Reserve Bank of
Australia (RBA) reducing the interest rate to the historically low rate of 2.0%.
Therefore, investors who are still heavily overweight in cash or cash products are being forced
to rebalance their portfolio to increase their exposure to risk assets, which generate a higher
rate of income.
By reviewing the current investment environment and examining how equities have performed
against other asset classes, this report builds a compelling case as to why investors should be
invested in equities.
TABLE OF CONTENTS
1.0 WHAT’S GOING ON GLOBALLY
2.0 PERFORMANCE OVER TIME
3.0 THE CASE FOR EQUITIES
3.1 THE CASE FOR EQUITIES - GROWTH
3.2 THE CASE FOR EQUITIES - DIVIDENDS
3.3 THE CASE FOR EQUITIES - ANNUAL RETURNS
3.4 THE CASE FOR EQUITIES - ACCEPTABLE VOLATILITY
4.0 OPPORTUNITY KNOCKS
5.0 WHERE TO FROM HERE
In this report we will demonstrate how maintaining a well-constructed, diversified equities
portfolio can provide exceptional opportunities to generate growth and income through tax
effective dividends.
WE WILL SHOW YOU THAT
OVER THE LONG TERM,
SHARES GENERATE INCOME.
1

1.0 WHAT’S GOING ON GLOBALLY?
Investors face the perpetual dilemma between risk and reward; between preserving capital and generating
growth. Now however, they face this dilemma in an environment of modest global economic growth and very
low interest rates.
The level of volatility and uncertainty surrounding the financial
markets has recently increased, reflecting mixed economic data
notwithstanding the strong accommodative monetary policies
adopted by Central Banks in the large advanced economies.
The Greek sovereign crisis once again weighed on the markets
recently but the strong austerity measures enforced by the Eurozone
Ministers in conjunction with Greek reforms saw the threat of
bankruptcy being avoided for the moment.
In addition, after years of rapid expansion, the Chinese economy is
now cooling off with lower economic growth. We expect the Chinese
government to deploy further monetary easing and other growthsupporting
measures in the coming months.
There have also been concerns over increasing commodity supply,
resulting in softening of commodity prices, particularly for gold, iron
ore, copper, and oil.
Perhaps the most encouraging sign of economic improvement is the
US Federal Reserve’s upgraded assessment of the overall economy
and its stated intention to increase the federal funds rate - the first
time in almost a decade.
Although the Australian dollar may now stabilise around US70 cents,
it has fallen significantly from US95 cents in mid-2014.
In Australia, the decline in commodity prices and the unwinding of
resource investment is exerting downward pressure on economic
activity, but stronger export volumes and the recovery in housing are
sustaining some moderate growth. Low interest rates and the lower
Australian dollar are also likely to support corporate earnings and the
economy’s ‘rebalancing’. We are currently forecasting the Australian
economy to grow by around 2.6% in 2015 and then 2.8% in 2016.
Even with the interventionist policies of the developed world’s Central
Banks, growth in most advanced economies has remained subdued,
unemployment has remained elevated, and these economies are
likely to continue to face headwinds for some time to come.
2

2.0 PERFORMANCE OVER TIME
It is important that our analysis takes into account the real life impact of tax and costs on ultimate investment returns.
As such, the following two charts look at the performance of various asset classes over the past 20 and 10 years ended
December 2014.
20 Year Investment Returns - after tax and after costs
Over the 20 year period, Australian shares outperformed all other asset
classes at both the lowest and highest marginal tax rates returning 9.7%
p.a. and 7.6% p.a. respectively. Residential investment property achieved the
second highest return of 8.9% p.a. and 7.5% p.a. at the lowest and highest
marginal tax rates respectively.
Australian bonds delivered a return of 6.1% p.a. and 3.9% p.a. respectively
over this period. It is interesting to note that those on higher incomes and
taxes over this period would have been better off investing in Australian
shares, residential investment property, Australian Real Estate Investment
Trusts (A-REITs), and hedged overseas shares.
CHART 1: ASSET CLASS INVESTMENT RETURNS FOR THE 20 YEARS TO 2014
10%
9.5
9.7
9.9 9.8
9%
8.9
9.0
8.6
8%
7%
6%
7.6
0.8
7.5
7.7
6.7
6.9
7.5
6.1
6.4
7.8
6.5
7.9
7.1
6.4
6.5
Gross return
Returns (%p.a)
5%
4%
3%
4.5
3.9
3.7
3.0
3.1
5.3
After tax lowest marginal tax rate
After tax top marginal tax rate
Superannuation
2%
1.9
Source: Russell Investments / ASX Long
Term Investing Report June 2015
1%
0%
Australian
Shares
Residential
Investment
Property
Australian REITs
Australian
Bonds
Cash
Overseas Shares
(hedged)
Overseas shares
(unhedged)
Note: All returns are net of costs. Past
performance is not a reliable indicator of
future performance
ginal tax rate
rginal tax rate
3

CHART 2: ASSET CLASS INVESTMENT RETURNS FOR THE 10 YEARS TO 2014
8%
7%
6%
7.1
7. 4.
7.6
7.0
6.2
6.2
6.5
7.8
6.8
6.9
5.3
5.3
5.5
5.4
5.4
Returns (%p.a)
5%
4%
3%
4.9
3.4
3.4
2.8
2.9
4.6
3.5
4.7
Gross return
After tax lowest marginal tax rate
After tax top marginal tax rate
Superannuation
2%
1%
0%
Australian
Shares
Residential
Investment
Property
1.6
1.3 1.3
0.8
Australian REITs
Australian
Bonds
1.8
Cash
Overseas Shares
(hedged)
Overseas shares
(unhedged)
Source: Russell Investments / ASX Long
Term Investing Report June 2015
Note: All returns are net of costs. Past
performance is not a reliable indicator of
future performance
10 Year Investment Returns - after tax and after costs
Over the 10 year period, Australian shares were the best performing asset
class at the lowest and highest marginal tax rate with returns of 7.4% p.a.
and 5.3% p.a. respectively. Hedged overseas shares produced the second
highest returns of 6.8% p.a. and 5.4% p.a. at the lowest and highest marginal
tax rate respectively.
In an environment of historical low interest rates globally, Australian bonds
have produced returns of 5.3% p.a. and 3.4% p.a. respectively.
4

THE CASE FOR EQUITIES
> GROWTH
> DIVIDENDS
> ANNUAL RETURNS
> ACCEPTABLE VOLATILITY
5

3.1 THE CASE FOR EQUITIES - GROWTH
We will now discuss the growth nature of equities.
All Ordinaries
The All Ordinaries Index, which is referred to frequently in the media, simply
looks at the price movement of the share market.
Below is a graph of the All Ordinaries Index from 1960 to 2015:
This graph demonstrates how equities perform as a growth asset over a
long time frame. Even taking into account extreme market occurrences - the
OPEC Oil Crisis in 1973, the 1987 Share Market Crash, the Tech Wreck of
2000 and the recent GFC of 2008 - over the long term the All Ordinaries has
still exhibited phenomenal growth.
CHART 3: ALL ORDINARIES INDEX PERFORMANCE 1960- 2015
7000
6000
2008 Global
Financial Crisis
5000
Index
4000
2000 Tech Wreck
3000
1987 Sharemarket Crash
2000
1000
1973 OPEC Oil Crisis
0
1960
1965
1970
1975
1980 1985 1990 1995 2000 2005 2010 2015
6

3.2 THE CASE FOR EQUITIES - DIVIDENDS
What the previous All Ordinaries chart does not take into account is the
impact of dividends on the overall return of equities. To understand the
importance of dividends and their impact we can compare the All Ordinaries
Index to the All Ordinaries Accumulation Index, which takes into account not
only price movement, but also the dividends paid by companies.
When investing in shares you must never underestimate the importance
that dividends play in creating wealth. Dividend income will materially
enhance the total investment returns in a low growth and low interest rate
environment, such as the one we are currently operating in.
CHART 4: TAKING INTO ACCOUNT DIVIDENDS - ALL ORDINARIES VS. ALL ORDINARIES ACCUMULATION INDEX 1980 - 2015
4500
4000
3500
Index re-based to 100
3000
2500
2000
All Ordinaries
All Ordinaries Accumulation
1500
1000
500
Source: IRESS
0
1980 1985 1990 1995 2000 2005 2010 2015
Chart 4 clearly shows how dividend income materially enhances the performance of shares.
7

3.3 THE CASE FOR EQUITIES - ANNUAL RETURNS
The graph below shows the annual returns that the Australian share market has achieved from 1980 to 2015.
CHART 5: ALL ORDINARIES ACCUMULATION INDEX ANNUAL RETURNS 1980-2015
75
50
25
The average annual
return over the period
from investing in the
share market, and
assuming that you
also reinvested your
dividends, is 13.4%,
which does not take
into account the effect
of tax on the investment
returns.
Percentage (%)
0
YTD
Average
= 13.4%
-25
-50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: IRESS
* Please note this average assumes all dividends are reinvested.
8

3.4 THE CASE FOR EQUITIES -
ACCEPTABLE VOLATILITY
The current level of volatility of the Australian share market is now slightly above the long term average after a long period of very low volatility.
CHART 6: AUSTRALIAN SHARE MARKET VOLATILITY 2008 - 2015
70
60
50
Volatility Index
40
30
20
Average = 22.0
10
0
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15
Australian equities have performed strongly over meaningful timeframes
even though there have been shorter periods of time in history when cash
and bonds have outperformed shares. Moreover, history has shown that
equities have delivered superior returns to other asset classes such as
cash and bonds, especially taking into account the relative impact of tax.
From this series of graphs we have seen:
• equities have performed their function as a growth asset notwithstanding
volatile periods
• dividends materially enhance the return of equities, and
• the current volatility of the Australian share market is now slightly above
the historical average.
9

4.0 OPPORTUNITY KNOCKS
As demonstrated in this report, there is a variety of asset classes from
which income and/or capital gains can be generated. Whether investors
choose equities, cash, bonds or property will have a significant impact on the
opportunity for capital and income growth.
The opportunity cost which households will pay by remaining cautious and
staying substantially invested in bank bills or bonds is very high.
Currently, the 1-year forward consensus dividend yield for the Australian
share market is 5.3% of which 80% is franked, and it is therefore equivalent
to a grossed up dividend yield of 7.1%. This dividend yield is substantially
above the current 90-day Bank Bill rate of 2.2%, the 12-month term deposit
rates of around 2.4% and the 10-year bond yield of 2.7%.
“Investors should remember that excitement
and expenses are their enemies. And if they
insist on trying to time their participation in
equities, they should try to be fearful when
others are greedy and greedy when others are
fearful.” Warren Buffett
We believe that by maintaining a well-constructed, diversified equities
portfolio, investors will be able to generate a higher level of income than they
would by holding other assets.
A portfolio of high quality, fundamentally strong businesses that are run
by experienced management teams, bought at attractive share prices, will
generate well above average returns for investors over the medium to long
term.
10

5.0 WHERE TO FROM HERE?
While the scale of the recent turmoil in global markets has no doubt affected
investor confidence, share market volatility is not new. It is important to
remember that all investments regardless of asset class go through cycles of
boom and bust.
The key to generating ongoing wealth is to understand your investment
requirements, to ignore the investing fad of the day and to focus on
implementing strategies that have been proven over time. Successful
investing is about having a long term perspective and the time invested
in the stock market. It is also important to invest in companies that are
fundamentally sound, which employ experienced management teams and
deliver consistent dividends.
Not trying to time the stock market is integral to creating wealth. Trying
to pick the top or bottom of an equities cycle is extremely difficult and it
compounds the risk of being out of the market if it should rally. While this
strategy does not provide protection from market downturns, it does ensure
investors benefit during times of market growth. When markets turn, they
can turn quickly.
History has shown that no single asset class outperforms year after year,
which is why diversifying your investments can help to minimise risk. While
portfolio diversification often starts with investing across different asset
classes, it also includes holding a spread of investments within a single
asset class. With the rise of different instruments listed on the ASX, it is now
possible to gain exposure to different asset classes through your Bell Potter
adviser.
By ensuring that your portfolio has a mix of the various ASX listed assets
that Bell Potter advisers have access to, you can take advantage of the
benefits that diversification brings. A portfolio that is diversified and properly
weighted is critical to delivering successful returns and minimising risk.
Three examples of alternative assets that can help diversify your portfolio are
Fixed Income products, Listed Investment Companies (LICs) and Exchange
Traded Funds (ETFs).
At Bell Potter we have dedicated specialists, who cover these three different
products. We produce a number of different documents and independent
research, which covers these various areas.
Fixed income: An investors guide >
Learn the basics: LICs >
Learn the basics: ETFs >
If you would like to discuss your portfolio in the context of the current
macroeconomic environment please contact us at 1300 0 BELLS (1300 0
23557) or info@bellpotter.com.au.
11

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firm that provides a comprehensive offering of
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includes individuals, institutions and corporations.
Founded in 1970 by Colin Bell, Bell Potter has grown to a total
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Bell Potter is a part of the Bell Financial Group of companies
(ASX:BFG).
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11 September 2015