The Hunt for Yield Is On — Part I: Bricks and Mortar Losing Their Shine

As far as I can remember, the Australian property market has been one of the easiest ways to build wealth and fund a future retirement with consistent, dependable rental income.

That idea is now under real pressure, and it’s coming from different directions at once…

At the federal level, negative gearing is back on the table. The Parliamentary Budget Office has costed a proposal to phase out negative gearing and the 50% capital gains tax discount for investors who own more than one property.

Nothing has been legislated yet, but the fact that it’s being modelled suggests there is a clear political appetite to pull back residential real estate as an investment tool.

At the state level, the changes are already here, and Victoria is leading the charge…

Since January 2024, the Victorian government has slashed the land tax-free threshold from $300,000 down to just $50,000.

Add on a temporary COVID debt levy that runs through to 2033, an absentee owner surcharge as high as 4%, and a vacant residential land tax that now applies statewide, and you can see why property investors have abandoned the state.

On a $1 million landholding, that’s roughly an extra $2,000 a year in land tax, on top of everything else a landlord already wears: agent fees of 7–8% of rent, insurance, maintenance, council rates, vacancy periods.

Headline rental yields in Sydney and Melbourne tend to sit in the low 3% range.

But if you strip out the costs above, the net yield starts to look ugly, perhaps barely breaking even. And that’s assuming you own the property outright with no mortgage attached!

Bottom line: with changes to tax laws, higher state land taxes, rising costs of hiring trades to fix stuff, all the mandatory maintenance and compliance checks, using property to fund retirement is becoming increasingly difficult.  

So where does an income-focused investor look instead?

One option: The Dividend Aristocrats

One area that’s worth a look is the ‘dividend aristocrats’: companies with a track record of raising their dividend every single year for at least 25 consecutive years.

The best-known fund tracking these companies is the ProShares S&P 500 Dividend Aristocrats ETF, listed on the NYSE under the ticker ‘NOBL’. Keep in mind that it is denominated in US Dollars.

Over that 20-year period, the S&P 500 Dividend Aristocrats Index delivered an annualised return of roughly 10.23%. That’s broadly in line with the S&P 500 but comes with far less volatility.   

The average dividend yield is also higher, 2.54%, versus 1.89% for the S&P 500, giving you an option to take more income without selling down the principal once you hit retirement.

While that yield doesn’t look particularly exciting on paper, once you stack up the costs of owning a property against today’s hostile political backdrop, it’s perhaps a reasonable alternative.

No land tax bill, no tenant, no agent fee and no maintenance call at 11 pm… Sometimes it’s nice just to keep life simple!

As tax settings around Australian property continue to shift, these income-focused equities could be worth exploring.

Next time: The Mining Dividend Aristocrats

In Part II, I’ll turn to my own patch, commodities.

It’s not usually a sector that you’d associate with high-yielding opportunities, but they are certainly there. This is where you could deploy ‘the stock picking’ portion of your portfolio.

To show you what I mean…

From my own standpoint, I’m thinking perhaps something like the NOBL dividend aristocrat ETF to house my core savings, say, 80% of my portfolio.

Then the remaining 20% goes towards specific resource names that generate strong cash-flow yields and potential to pay out strong dividends.

So, today, we looked at that 80%. Next time, we’re going to dig into the 20% and highlight some commodity names that could fit our criteria.

Stay tuned.