Was it luck?
Skill?
Good management?
I'd like to think it was all three of the above.
I'm talking about my decision to weigh into the market yesterday morning to snap up shares in one the fastest growing, yet cheapest, and higher yielding stocks in the ASX 100 — a stock Scott Phillips recently named as one of his 3 ASX Best Buys Now Stocks, exclusively to Motley Fool Share Advisor subscribers.
As it turns out, courtesy of yesterday's stunning turnaround in the ASX, I'm already sitting on a handy little profit. It's a nice start, of course, but if Scott's right about the long-term prospects for this fast-growing company, this could be just the beginning of something very beautiful.
In case you are wondering…
Yes, it was luck that the market turned so quickly, and so decisively.
Yes, it was skill, to buy when all around were either selling or sitting on the sidelines, expecting even worse.
And yes, it was good management to buy a higher yielding stock, especially in this ongoing low interest rate environment.
On that latter point, yesterday I received the dreaded email from my online "high" interest savings bank account…
Unless I missed something, the RBA didn't cut the base rate from its record low of just 2.5%.
So what gives?
Sadly for me, and many other savers, even interest rates of 3% are on borrowed time.
Analysts at Morgan Stanley last month suggested Australia has a growing cash problem. Since the GFC, cautious Australians have added $613 billion to bank deposits, a 57% increase.
But, according to the investment bankers, all that could change, for three reasons…
1) The official cash rate is likely to languish at a record low of 2.5% for an extended period.
2) Banks are in a much stronger funding position, allowing them to whittle away the premium offered to depositors. See the my new rate above.
3) Lower global risks reduce the attractiveness of low-returning cash reserves.
In the face of low and falling interest rates, where do you turn?
To earn an ongoing income, you could work for longer… into your 70s, if you fancy that, and there are jobs about. I don't.
You could buy an investment property, at the top of the market, with a net yield of 3%, if you're lucky. I don't feel lucky.
Or you could buy dividend paying shares, preferably of the fully franked variety, with grossed up yields of above 7%, when the stock market is going through one of its inevitable wobbles and prices are cheaper. Count me in.
The stick in the ointment is volatility.
It scares many investors. Only in the stock market are your investments repriced second by second, every working day.
Zoom out a little, and think about the utter insanity of such activity. And what for? To make you feel wealthier (and smarter) on days the market is rising, or to make you feel poorer (and dumber) on days when the market is falling.
Insane.
But there is another way…
My friend and colleague Andrew Page — our resident Dividend Expert — recently tasked me with finding my Number One Top ASX Dividend Stock.
The brief was relatively simple…
- Dividend yield above 4%.
- Fully franked dividend.
- A safe, and growing dividend.
- A lower-risk stock.
- No banks allowed.
It was easier said than done, especially given the last point on the list.
Why no banks? Many Australian investors are already overweight the banks — as such, they need to diversify their portfolios, not make them even more concentrated. Plus, I do like a challenge.
The worksheet below gives you an insight into my stock picking process. There are a couple of stocks I rejected, including mining services company Maca Ltd (ASX: MLD), and a few that were strong candidates, including JB Hi-Fi Limited (ASX: JBH), but ultimately didn't get the final go-ahead.
Source: Google. Click to enlarge.
Of the four blackened out stocks, two are very strong candidates, one I need to get to know a little bit better (9% fully franked dividend yields usually come with much higher risk, although this one has certainly got me interested), and the other was the one I ultimately chose to be My Number One Top ASX Dividend Stock.
For the past few months, behind the scenes, Andrew Page has been working on a special project focusing on dividend paying stocks.
And not just the usual suspects either — he's looking for dividend payers that pass all the criteria above, AND have the potential for market-beating capital appreciation. In short, the best of both worlds.
I have the same hopes for my top dividend stock. I don't have any in my own personal portfolio — the Motley Fool's strict trading rules mean I can't buy the stock in advance of publicly revealing the name of the stock — but I will be doing so when I'm allowed… which isn't too far away now.
Stay tuned… if its dividend stocks you're after, of the fully franked variety, Andrew Page has got a treat for you.
The reasons investment properties have been so attractive to Australian investors are fourfold…
1) The negative gearing tax break.
2) The rental yield.
3) The capital appreciation.
4) The lack of volatility.
Save the volatility, the reasons dividend paying stocks should be attractive to more Australian investors are exactly the same as investment properties… only even better.
1) The dividend imputation system, or franking credits, offers Australians a significant tax break.
2) They pay regular income, in the form of dividends.
3) Chosen carefully, the right dividend paying stocks have the potential for significant capital appreciation.
If only the volatility — the day to day, often meaningless, oscillation of share prices — could be removed….
I have a simple solution…
On the table above, focus ONLY on the yield column, as it stands today.
A 5% fully franked dividend yield grosses up to a 7.1% yield when franking credits are taken into account. That is your starting point. Compared to the returns on offer from term deposits and rental yields, it's VERY attractive.
If you've done your homework right, and picked the right underlying stock, the dividend should grow in the years ahead, maybe by 8-12% per annum.
Fast forward ten years, and a 5% dividend yield growing at 10% per annum turns into a near 13% dividend yield, or 18.5% grossed up for franking credits.
Welcome to the miracle of compounding returns — but only if you can stick out the inevitable periods of volatility.
The message is clear…
If it's tax effective income you crave, and volatility you fear, by focusing only on the dividend yield, and not the share price, by buying dividend paying stocks, in this low interest rate environment, you can and should beat most other forms of investment returns, over time.
A case in point is Woolworths Limited (ASX: WOW), a stock my family has owned since it floated way back in 1993.
Back then, Woolworths were paying a full year fully franked dividend of 12 cents per share, equivalent to a 4.9% fully franked yield, based off the float price of $2.45.
Fast forward to today, and Woolworths are now paying a full year fully franked dividend of 137 cents per share, equivalent to a whopping 56% yield, based off the float price of $2.45.
Woolworths is what I call a Millionaire Makers stock — and with dividend yield numbers like that, added to a 1300% capital appreciation since float, it's not hard to see how you could have turned a relatively modest sum of money into millions of dollars… simply by buying, holding and reinvesting your dividends into a Millionaire Makes stock like Woolworths.
Stating the obvious, Woolworths is NOT the Millionaire Maker stock of tomorrow. The company is simply too big.
But Millionaire Maker stocks are out there. Maybe one of them is lurking in my table above. Or maybe Andrew Page, our resident Dividend Expert, can uncover a few such stocks.
Keep your eyes peeled… soon, we'll be bringing such stocks to YOU.
