FYI | Sep 21 2016
By Peter Switzer, Switzer Super Report
I love dividend-paying stocks, especially when the company is a solid one that people have to work with on a daily basis. I hold mining stocks but only ones I bought at low prices. They’re likeable but generally I love dividend stocks and hate mining stocks.
If I was a thrill seeker when it comes to building wealth, I’d love mining stocks and I’d try to be a timer, taking profit when it looks good to do so and buying in when the market goes mad on the downside.
We saw this with BHP-Billiton this year when it went to $14. I didn’t have the guts to buy then — I’m not a thrill seeker but around $16 I pressed the buy button.
But that was an outside the square play for me, as I love dividend-paying stocks, as I’ve said.
To prove the good sense of my passion, I looked at 10 good dividend-payers bought at 1 September 2008, just before Lehman Brothers plunged us into the GFC stock market crash and on 6 March when the market came out of the death spiral, which saw the S&P/ASX 200 index lose 53%!
Long-term Switzer readers know I was tipping a bounce-back in 2009 but I didn’t know when and for a couple of months I was playing around with my credibility, but we got there with the market recovery kicking off.
To test out my passion, I lumped together 10 stocks someone could easily have held if they were dividend players. They were the four big banks, Telstra, Woolworths, Coca-Cola Amatil, Amcor, AGL and AMP.
If you’d bought these stocks in September 2008 and you use roughly today’s dividends, your average yield is 6.7% plus franking. If you are a retiree, we’re in the 8.5% neighbourhood.
If you were lucky and courageous enough to buy in March 2009, your average yield would be a huge 11.1% per annum and it underlines the benefits of courageously buying when everyone is fearful, as Warren Buffett advises.
This was despite the fact that Woolies had a shocker over that time period.
Capital gains wise, the story is not great but, as we know, our S&P/ASX 200 index has not recovered to pass its all-time high racked up in November 2007. That was 6828.70 and we’re still 28% off that benchmark.
If you bought those 10 stocks on 1 September 2008, you’re down 20% on your capital outlay but the 6.7% plus franking credits means you have pocketed about 70% in dividends. So it’s still a pretty good story, playing stocks the safe or non-thrill seeker way.
If you’d been lucky enough to buy in March 2009, you’re up 11.1% plus on capital but you’ve made 9.3% on dividends plus franking credits.
My initial calculations threw in BHP and Rio but because these two companies have been crushed by the end of the mining boom, the capital losses have been shocking. It was 9.7% since March 2009 and 18.4%, if you bought in before Lehman Brothers crashed in mid-September 2008! And at the same time your yield would have been a lot lower.
We all talk about how well CBA’s yield has rewarded dividend hunters — 14.6% now if you bought at $28.66 in March 2009 and 9.9% if you bought in September 2008 at $42.39.
But have you looked at Amcor? This company that doesn’t even pay franking credits returns a yield of 13.6% if you bought in March 2009 and 10.1% if you bought in September 2008.
ANZ’s story for these two buy-in dates was 13.5% and 8% respectively and it helps underline my point that even companies that have had some market challenges can still deliver via their commitment to dividends.
In a perfect world, I like 20 companies, while fund managers often reach for 30-40 but getting 30 consistent dividend payers is harder to find for part-time fund managers, who run their own portfolios or SMSFs.
If someone had dividend-payers as a core holding and simply took an ETF for the S&P/ASX 200 index, they could have added growth to their story, which went from 3145 to 5300, which would have been a 68% gain plus dividends and franking credits.
Anyone who doesn’t need income could slant their portfolio towards growth and away from income. But if you wanted income, an 11% or 8% annual payday depending on whether you bought in September 2008 or March 2009, then hunting for yield makes a lot of sense.
Last week on my TV show I followed up with an AFR story that said “the hunt for yield was over” but I think there are some of us who will always hunt for yield. And sure as the March 2009 numbers show, it’s more rewarding when markets go very negative but as the September figures show, they’re still pretty good at higher levels.
So what’s the bottom line? Keep the faith with dividend-paying stocks, pocket the capital gain as cream on top of the cake and don’t be a chicken during scary times — see it as a buying opportunity, provided your companies are quality performers.
I would also add that 20 stocks are better than 10 stocks as it reduces your exposure to companies like Woolies that can be a negative surprise package.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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