Although the All Ordinaries Index is trading some way below its pre-GFC peak, when you include dividends, it's trading at an all time high.
Following 6 years of solid gains, including dividends, the local bourse has essentially doubled, prompting some investors to suggest shares are expensive and we're therefore set for a share market crash.
It's true. The market is, on average, expensive relative to earnings, assets, sales — or most other measures you care to use, at least compared to historical norms.
And all at a time that the Aussie economy is attempting to navigate through the end of the mining boom, and is lumbered with record household debt and an over inflated property market.
It's hardly an attractive situation for those who are looking for decent returns, especially when — thanks to record low interest rates — there seems to be little other option for prudent investors.
Run For Cover?
At times like these, when market corrections seem imminent, it can be tempting to sell out and wait for the things to calm down.
The trouble is that it requires you to be able to accurately time the market; something which no one, repeat , no one, ever, has been able to do consistently.
Ironically, if you get the timing wrong, your efforts to avoid loss could actually result in even greater loss!
The fact is, at virtually every point in time, you can mount a salient argument as to why shares are expensive and why a crash is coming. And there is always an 'expert' or two doing exactly that.
Forget About The Market
The first thing to remember is that your individual portfolio doesn't need to resemble the broader market.
And given that the ASX is dominated by miners and banks — both of which are far from appealing at present — that's probably not a bad idea!
We can pick and choose from nearly 2,000 listed companies, and within that sample there remains some great companies that are still at good value.
Importantly, companies that are well placed to weather any economic challenges, but will also prosper if the party keeps going. It's the investment equivalent of having your cake and eating it too!
So what do you look for?
You want companies whose profits tend to hold up well when the going gets tough.
That do not require much ongoing investment, and as such can return much of their profits to shareholders in the form of dividends.
And, importantly, companies with very modest debt levels — if there is one thing that brings a company undone in a downturn, it's high debt!
If you are particularly concerned with issues that are uniquely impacting Australia — such as commodity prices and China — you could also look for businesses that generate a good deal of their earnings overseas.
Not only will they avoid any local problems, they'll likely get a currency kick too if the Aussie dollar weakens.
A Case In Point
My latest recommendation for Motley Fool Dividend Investor ticks many of these boxes. As such, it's little wonder that it's not once cut its dividend — even throughout the GFC.
Take a look…
This company's earnings can be somewhat cyclical due to the industry it operates in, but because it generates so much free cash flow it was easily able to support the dividend payments to shareholders.
For much of this time it has been entirely debt free and today generates close to half of its earnings offshore. Much of those earnings are recurring in nature too.
The business is the industry leader, has high levels of customer retention and generates exceptional returns on investment. Best of all, it is very scalable, which means it incurs very little incremental cost for each new unit it sells.
Whatever the future may hold, this is a business that will almost certainly always be around, and providing shareholders with attractive returns.
Today, it continues to offer investors an attractive dividend, which grosses up to a yield of 4.6% when franking credits are included.
One Of Many
The financial media likes to focus on high profile companies like BHP Billiton (ASX:BHP), Qantas Airways (ASX:QAN) and Woodside Petroleum (ASX:WPL) — all of which operate in industries with terrible economics — but there are plenty of quality Australian that largely go unnoticed by the average investor.
Like all listed companies, their share prices can be volatile, but they are supported over time by dependable and rising earnings. Earnings that fund attractive and tax effective income streams that their shareholders can depend on in good times and bad.
So forget about what the broader market is doing. By cherry picking the best of the best — which is what we do at Motley Fool Dividend Investor — we get to enjoy better average returns than the wider market, and all with much less risk.
Since we launched Motley Fool Dividend Investor last year, the companies we've recommended have averaged a 24.3% return — well above the market's 4.9% (both including dividends).
And best of all, there are plenty of other 'under the radar' income stocks we'll be revealing to Motley Fool Dividend Investor members in the coming days, weeks and months. Click here to sign up now, saving 50% off a TWO year membership.
With interest rates at just 2 per cent, and with the RBA potentially cutting even further later this year, why would you look anywhere else?
