Michael Lang: Capital gains goes begging

While the market cap of the NZX has been static for nearly 20 years, returns have grown by 6.1 per cent a year. Photo / Richard Robinson

Imagine if you could buy your neighbour's house for the price it was valued at 16 years ago? Few investors would hesitate.

Ironically, the New Zealand share market is trading at the same price level now as it did in 1993 and is some 50 per cent below its 2007 levels. This is despite the value of New Zealand's GDP increasing by more than half since 1994.

Just because the share market is cheaper is not a reason on its own to buy stock. There can be any number of reasons it may be trading at a lower price than in the past.

For example, a dramatic change in economic conditions might have changed investors' earnings estimates, or their willingness to pay for expected earnings might have changed.

However, a major opportunity for significant capital gains exists today. Another way of looking at returns to sharemarket investors from simply looking at market capitalisation is to look at investors' gross returns.

While the market cap of the NZX has been static for nearly 20 years, returns have grown by 6.1 per cent a year.

Some argue there is a link between high dividends and low capital growth. What cannot be refuted is that the dividend streams paid out to investors are real and have provided returns over the past decade and a half.

This yield is not purely historical. Currently, the top 20 dividend yielding shares in the NZ Stock Exchange offer an imputed average dividend yield of 8.8 per cent, making it one of the highest dividend paying sharemarkets in the world.

Additionally, most share investors need not pay tax on either their capital gains or dividend income.

So the market has been flat for many years but has provided a steady return when dividends are taken into account.

For investors who are on the sidelines it looks about as close to a win/win suggestion as you get in the investment world.

* Michael Lang is chief investment officer of NZ Funds