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What are Hybrids?
From our InvestSMART Hybrid Income Portfolio Page:
Designed for investors an opportunity to diversify their income stream with a portfolio of predominantly ASX-listed hybrid securities.
Hybrid securities combine elements of debt (like bonds) with aspects of shares. Our Hybrid Income Portfolio gives investors the potential to earn a higher return than fixed-interest securities though still with a regular income.
What role do hybrids play in my portfolio as a retiree?
What role do hybrids play in my portfolio as a retiree?
Hybrids are preference shares that pay a floating rate of return each quarter which is usually franked. This is a good source of regular income for retirees, similar to, though riskier than, a term deposit.
What asset class do they fall into, and approximately what percentage of that asset class should I apportion to hybrids?
Hybrids are typically held as defensive assets, though there is some equity risk.
Therefore, these are typically included as part of your bond or fixed interest allocation and should be less than 50% of that allocation.
What relationship do rising interest rates have on hybrids?
What relationship do rising interest rates have on hybrids?
Rising interest rates are not usually good news for bond and fixed-interest portfolios, as capital values tend to fall. However, as hybrids have distributions based on a fixed margin above the cash rate, as the cash rate increases then, the distributions increase.
Do you restructure the portfolio to have more floating-rate hybrids instead of fixed ones?
Do you restructure the portfolio to have more floating-rate hybrids instead of fixed ones?
The portfolio currently only has floating rate hybrids which the major banks have issued.
Why is the minimum investment amount $25,000?
Why is the minimum investment amount $25,000?
There are currently ten securities in the portfolio which provides a spread of maturities and different corporate exposures, and it is unlikely that the portfolio will hold fewer.
With a minimum brokerage charge of $4.40 (inc GST), the brokerage costs for buying the ten securities for investments less than $25,000 would be high and would impact returns.
Will I ever receive shares on the conversion date? What happens there?
Will I ever receive shares on the conversion date? What happens there?
When a hybrid reaches its first “call” date, the issuing bank has the choice to pay the investor in shares or cash equivalent to the issue price of the hybrid (usually $100).
To date, all the major bank hybrid issuers have redeemed their hybrids for cash. If an issuer decided to issue shares, you would receive enough shares to give you the same cash value as the issue price.
Do I get franking credits from hybrids?
Do I get franking credits from hybrids?
All the hybrids in the InvestSMART portfolio pay franking credits on each distribution.
How do I claim my franking credits?
When you lodge your tax return, you will receive a credit for the tax already paid on the hybrid distribution. Depending on your tax situation, you may get a tax refund.
What is the difference between a bond and hybrid?
What is the difference between a bond and hybrid?
A bond is issued as a note by a corporate or government and is redeemed on a fixed date in the future. Bonds usually pay a fixed rate of interest semi-annually.
Hybrids are preference shares and rank below bonds in the event of a liquidation of the issuer, pay dividends that can be franked and usually have no maturity date. Investors are relying on the issuer to “call” (redeem) the issue to be repaid or will have to sell on the ASX to get their investment back.