High Yield Investing in the New Zealand Stock Market
Stocks in New Zealand offer higher dividends than can be obtained in any other developed country.
In mid-2006 the average dividend paid by New Zealand's 50 biggest companies (NZX 50) stood at over seven percent.
This is three times the yield available from the FTSE 250 in the UK or from the Dow Jones Industrial Average in the United States.
Not surprisingly, the New Zealand market has become popular with investors - both in New Zealand and overseas - seeking above average dividends.
Overseas investors' decisions are made more complex by exchange rate fluctuations. Many informed UK and US investors took large positions in New Zealand in 2001 - 2003, when the NZ Dollar was weak.
These investors have enjoyed a triple benefit:
The NZX 50 has outperformed British and American indices.
Dividends paid by NZX 50 companies have exceeded those paid by US and UK companies.
The NZ Dollar has strengthened.
Clearly there is a risk that, if you make an investment from overseas when the NZ Dollar is exceptionally strong, you could lose on currency movements if it weakens. This is not a risk that New Zealand's resident investors need to consider. These investors - many of them so-called mum and dad investors - continue to invest heavily in New Zealand companies for their attractive yields.
Tax Advantages - Tax Free Dividends
High yields from New Zealand stocks are made all the more attractive because they are effectively tax-free.
The theory is that, since a company has already paid tax on the money it pays as dividends, shareholders are not required to pay tax again on the same money.
In practice, companies do deduct tax from the dividends they pay to shareholders.
But this tax is recognised in the form of "imputation credits".
These are tax credits that investors use to reduce their total tax payments.
Overseas investors are not entitled to imputation credits. To compensate for this, most New Zealand companies pay higher dividends to overseas investors than they pay to resident investors. The result of the additional payments are to make the overall net payments to overseas holders similar to those received by New Zealand residents.
