Happy Monday! Happy share portfolio.
The Australian share market has just enjoyed its best week since December 2011, the S&P/ASX 200 Index last week jumping a massive 4.5% to close just shy of 5,300.
Somewhat unbelievably, BHP Billiton (ASX: BHP) shares jumped 13.3% for the week, now back trading above $25.
Not to be outdone, Santos (ASX: STO) shares had a stormer of a week, up a stunning 42% on the week.
In fact, it was party time everywhere you looked, with oil up, the Aussie dollar up, Wall Street up, iron ore up, zinc, lead, copper, nickel, Japan, Europe and even gold all up too.
The losers?
Qantas (ASX: QAN) shares took a breather, hit by the higher oil price, its shares falling 5% over the course of the week. Still, Qantas shares are up almost 170% this year…
The other big loser remains cash, courtesy of these ongoing ultra-low interest rates.
And on that front, don't expect interest rates to rise any time soon, especially if the American experience is anything to go by.
The US economy is chugging along nicely, with unemployment standing at just above 5%. Yet the Federal Reserve has kept US interest rates at close to 0%.
Compare that to Australia…
Here, unemployment is north of 6%. The RBA wants a lower Aussie dollar. Our GDP growth is below-trend. And then there's the end of the mining boom to deal with at a time when Chinese growth is rapidly slowing…
Add it all up, close your eyes, and you'd be thinking Australia should be the economy with 0% interest rates, not the US.
Thankfully we're not at 0% interest rates here in Australia… imagine what "free money" would do to the ongoing house price bubble.
But we could be heading that way, and sooner than you might think!
It was only last week when Citi said it was expecting the RBA to cut interest rates on Melbourne Cup day, and that an additional interest rate cut would come shortly after, bringing the cash rate down to just 1.5%.
Holy goodnight, term deposits…
So what's an investor to do?
- Money in the bank is safe, but earns your diddly-squat.
- Investment properties are expensive, and rental yields earn you diddly-sqat.
- The Australian share market is volatile, but fully franked dividend yields are exceptionally high, especially when compared to the cash rate.
If you can handle the volatility (and we can help you), by comparison to the other options, the share market is a no-brainer.
Take the aforementioned BHP Billiton, for example.
Even after its 13% gain last week, BHP Billiton shares still trade on a forecast dividend yield of almost 7%, fully franked!
Let me be clear… an investment in BHP Billiton is not without risk. The dividend is uncovered by profits, and the iron ore price is likely to come under-pressure again as increased supply meets a slowing Chinese economy.
I own BHP Billiton. But I've put my holding on double-secret probation. Although BHP's dividend yield is attractive, you don't buy mining stocks for their dividend.
That said, I have a lot of respect for Andrew Mackenzie, the Scottish head of BHP Billiton. He's cutting costs, focusing the company, sweating the existing assets, and has publicly committed, numerous times, to maintaining a progressive dividend policy.
If anyone can save BHP's dividend, it's Andrew Mackenzie. But it won't be easy.
BHP isn't the only company in my portfolio trading on an attractive dividend yield.
Telstra (ASX: TLS) shares trade on a forecast fully franked dividend yield of 5.6%.
Woolworths (ASX: WOW) shares trade on a fully franked dividend yield of 5.2%.
When compared to interest rates now, and to the level where Citi think interest rates might fall, such tax effective (fully franked) dividend yields are very attractive.
Still, a little like BHP Billiton, Telstra and Woolworths are not without risk.
Telstra has recently been ordered by the competition watchdog to cut its wholesale network prices by nearly 10%. Competitors like TPG Telecom (ASX: TPM) and M2 Group (ASX: MTU) are snapping at its heels in the broadband market, as is a resurgent Vodafone in mobile.
Woolworths is currently looking for a new CEO, is facing margin pressure in its supermarket business, and its Masters home improvement business is nothing short of a complete train wreck.
You should never buy a company for its dividend alone. Just ask Myer (ASX: MYR) shareholders how such a strategy worked out for them.
When it comes to dividend shares, I look for companies that are growing both their earnings and their dividends.
A case in point is Australian Pharmaceuticals Industries (ASX: API), the owner of Priceline Pharmacy, a company I bought after our dividend expert Andrew Page recommended the company to subscribers of our Motley Fool Dividend Investor stock-picking service.
When Andrew Page first tipped them as a buy, API's fully franked dividend yield was 4.3%.
But the dividend yield was only part of the story. What Andrew saw — and which seemingly few other analysts could see — was the explosive growth potentialin the underlying Priceline business, especially in health and beauty.
Fast forward a few months, and API shares jumped significantly higher after the company revealed it had grown profits by 32% and raised its dividend by 33%.
API shares have nearly doubled since Andrew first recommended the company to Motley Fool Dividend Investor subscribers, the shares being a wonderful case-study in what can happen when earnings growth and dividend growth collide.
Today, Andrew rates API shares as a hold, happy to look elsewhere for his one top dividend stock to buy right now.
For Motley Fool readers eager to find out the name of Andrew's top dividend stock, tomorrow afternoon he'll be unveiling his Best Buy Now dividend stock to members of his Motley Fool Dividend Investor stock picking service.
With a scorecard chock full of growing companies paying growing dividends — including one trading on a fully franked dividend yield of close to 8% — it's something any discerning investor would be foolish to miss.
