Now comes the hard part…
You've enjoyed the good times… when stocks went nowhere but up.
You've seen bank stocks do no wrong… and pay you juicy fully franked dividends.
You've watched, and prospered, as Telstra (ASX: TLS) shares hit highs not seen since the heady days of 2001.
And now…
Stocks are on the nose. The S&P/ASX 200 Index is teetering on the edge of official 10% correction territory. The magic number is 5,111.
This morning, we were as good enough in correction territory, already. And the pain may not be over yet… Wall Street is "only" down 6.8% from its September 18th 2014 record high. Markets really do climb stairs but fall down elevators.
Speaking of Wall Street, overnight the whiff of panic just got that bit smellier — the clue is in the "action" at the end of the trading day, as per the image below…
Such activity brings back memories of the GFC… not the economic crisis, but the volatility on Wall Street, which was amplified at the day's end.
Put it down to day traders trying to balance their books before logging off for the day. Put it down to high frequency traders eking out a few more fractions of cents in ill gotten gains. Put it down to the last horse race effect, "Race 9, The Get Out Stakes," where punters throw whatever money they have left at bookmakers, hoping for a last chance winner.
Whichever way you look at it, the accelerating, late afternoon losses is a classic example of indiscriminate selling.
And as any discerning investor will tell you, it's precisely during times of indiscriminate selling that long-term focused investors can pick up a bargain or two.
Speaking of which, today I put a little more money to work in the markets.
Overnight, I opened a couple more bullish option positions in US stocks. Happiness is to awake to find a couple of the limit orders you placed last night have been filled.
This morning, on the ASX, as flagged yesterday, I snapped up shares in one of Scott Phillips' brand new 3 ASX Best Buys Now Stocks, taken exclusively from the Motley Fool Share Advisor scorecard.
Out of respect to the thousands of Motley Fool Share Advisor paying subscribers, and to The Motley Fool's own strict internal trading rules, I can't reveal the name of the stock. I trust you'll understand.
What I can tell you is the shares are cheap — more so now they are down a whopping 20% from their recent all time high.
And the company is still growing quickly, as witnessed by the huge 30% jump in their full year dividend. A lower share price combined with a higher dividend equals a very juicy dividend yield of around 4%, partially franked.
In isolation, a 4% partially franked dividend yield may not sound overly juicy, especially when you compare it to typical high yielding blue chip stocks like ASX Limited (ASX: ASX) and Orica Ltd (ASX: ORG), both trading on dividend yields of around 5.1%.
But… and it's a BIG but…
Not all dividend stocks are created equal.
When it comes to the dividend stocks I'm adding to my portfolio, I'm looking for more than just a juicy dividend yield.
I'm looking for…
Downside protection.
A company can have the best looking dividend yield in the world — take BC Iron Limited's (ASX: BCI) trailing yield of 20% as an example — but if the share price falls by 70% so far this year, as it has for the junior iron ore producer, the dividend yield is all for nothing.
A growing dividend.
The aforementioned ASX Limited grew its most recent full year dividend by 4.6%. Decent, but nothing to write home about. By comparison, Ainsworth Game Technology Limited (ASX: AGI) recently boosted its dividend by 25%, and now yields a very respectable 3.4%. With a growth rate like that, it won't take long for Ainsworth's yield to pass that of the ASX.
A franked dividend.
The tax advantages of franked dividends are simply too good to pass up. It's your chance to legally beat the taxman, with franking credits able to be offset against your taxable income. For many retirees, this results in a tax refund. Happy days.
Capital gains.
Not content with pocketing the franked dividend, I'm also looking for capital appreciation from the stocks I buy. Up until recently, bank shareholders have enjoyed this "best of both worlds" scenario. Just take a look at the wealthy glow shining from the faces of long-term Commonwealth Bank of Australia (ASX: CBA) shareholders.
Contango MicroCap Limited (ASX:CTN) is one such company.
It doesn't tick every box, but gets mightily close, the above average yield being the icing on the cake. The recent market wobbles have seen the shares in this high quality listed investment company (LIC) fall all the way back to $1.02… where the stock trades on a forecast dividend yield of 6.67%.
And the best thing? The stock trades at a 10% discount to its net asset value, and Contango MicroCap offers a firm dividend policy. Nothing's guaranteed in the investing world, but this comes pretty close. I already own the stock in my SMSF, and might just add some to my non-retirement portfolio.
Why the ongoing focus on dividend paying stocks?
Two main reasons…
- My belief that interest rates will stay at these record low levels for much longer than the mainstream press and analysts are thinking. Heck, I wouldn't be surprised at all to see the RBA cut interest rates further from here. You could hardly say the Aussie economy is booming, especially with unemployment riding at 6%.
- According to S&P Capital IQ, the S&P/ASX Accumulation index (which includes the reinvestment of dividends) has achieved a total shareholder return of 189.52% between 24th August 2000 and 25th September 2014. When dividends are ignored, the total shareholder return is just 61.61%. In other words, dividends made a 3-fold difference to your total investing returns.
The figures above come from Andrew Page, our resident dividend expert. He lives and breathes dividends… and based on the above, with very good justification.
For the past few months, behind the scenes, Andrew has been getting down and dirty with ASX dividend stocks. Not your usual suspects, mind you, but those that fly under the radar of the vast majority of Australian investors.
You may have seen Andrew on Sky Business News, starring on the ever-popular Your Money, Your Call segment. Before joining The Motley Fool earlier this year, Andrew's most recent work included advisory work for a private "members-only" investment club made up of some very wealthy Australians.
In the coming days I'll tell you more about Andrew's brand new special project, something that's been months in the making.
You'll also get the chance to find out my Number One Top Dividend Stock.
After having raised its most recent full year dividend by a handy 14%, the stock now trades on a fully franked dividend yield of close to 5%. The company is growing, the downside is limited, the dividend is fully franked and the prospect of capital gains is excellent… especially now the stock is trading at close to a 52-week low.
In short, it passes the 4 point test I look for when I hunt for the market's best dividend paying stocks… what I'm calling the Millionaire Maker Stocks of Tomorrow.
Watch this space…
As I've been writing this, low and behold the ASX has made a miraculous recovery. Lucky for me I bought first thing this morning…
If you ever wondered what a few dollars added to the price of iron ore looks like, wonder no more…
Source: The Age
Correction averted, for now anyway… although you can be sure that when Wall Street opens again late tonight, it won't be taking one jot of interest in what's happened to our markets. High frequency traders have no feelings for our portfolios. If the market's going down, they'll happily push it down further. The reverse is true too.
All you need to is to stay cool, calm and collected in this face of this increased stock market volatility, and remain focused on the big picture…
1) Interest rates are low, and staying low.
2) By comparison, dividend paying stocks are very attractive, especially the fully franked variety.
3) Hold good quality companies, bought at attractive prices, for the long-term. Let the power of compounding returns do the heavy lifting.
4) Live a long, health, wealthy life.
