Lately, a number of my clients have been indicating they want their portfolios to be more income-oriented, which I think is a great idea. On the other hand, I have a client with about $2 million in his fund, who likes to invest in stocks and have a fair bit of control.
We’ve had an impact on this client’s core portfolio but he likes to try to shoot for ‘alpha’ to snag big returns. And because he likes promising tech/growth companies, he’s down about 20% this year!
Happily, I pointed out that he made $117,000 in income. I cheekily reminded him that he wasn’t responsible for that because he doesn’t buy income-paying stocks, but we do!
That income stream provided a return of 5.85% before franking credits. Let’s call it around 7.5%. You can see why a lot more people are becoming more interested in dividend-paying companies.
For tonight’s TV show, I interviewed Marcus Bogdan, founder of Blackmore Capital. Marcus now manages the Switzer Dividend & Growth Fund. I wanted to know the three big reliable income-paying stocks in his fund but I kicked off by asking what he’d returned for investors by way of dividends this year.
He said it was a tick over 6% and with franking credits it was around 8%, which I was glad to hear. Marcus specialises in searching for great dividend payers in the fund that can have 20-35 stocks. He’s now holding about 25. If you want to be your own fund manager, it’s a good idea to hold a fair few companies so any ‘dud’ performer will be KO’d by the other better income payers.
Marcus said you have to be careful of one-time great income stocks, such as AMP, because they can become value traps.
Let’s look at his top three stocks:
- Amcor
- CBA
- Woolworths
I made the observation that he seems to be hooked on best-of-breed companies in the different sectors he’s invested in. To that, he emphasised the importance of putting his money into quality companies, best in the sector and with a reliable track record for paying dividends.
Anyone armed with this guidance would have dumped AMP well before it really became a basket case.
AMP
Contrast this with Amcor over the same time period.
Amcor (AMC)
The same contrasting trend shows with Woolworths.
Woolworths (WOW)
Ditto for CBA.
Commonwealth Bank of Australia (CBA)
If you don’t think you’re up to finding 20 or so great dividend paying stocks, you could easily invest in a number of funds such as SWTZ or Vanguard’s VHY that do the share hunting for you as well.
Each fund will probably have core holdings such as CBA but they’ll also have differences that could give you both greater diversification and potentially better returns.
I’ve always argued that for many investors creating a core portfolio of say 80% based on income and say 20% used for chasing bigger returns (provided they’re quality companies that have simply been punished by the market temporarily). What’s an example of that?
Well, JB Hi-Fi (JBH) has lost support because retailers did well during the lockdown but now consumer spending on services business is expected to have a nice run at the expense of product-selling companies.
The analysts tip there’s 18.5% upside for JBH, but Credit Suisse expects it to be more like 33%! By the way, the forecast yield for JBH is actually 6.1%, so this offers both growth and yield!
Another might be Goodman Group (GMG), which FNArena says has a potential rise of 38.1% but Macquarie goes for 45.3%. The forecasted dividend yield is only 1.8% but hell, it is a growth company!
By the way, SWTZ is currently at $2.45 and will probably slip with the expected sell-off this week but ,in times when the stock market is on the rise, it’s worth noting that the price has been as high as $2.80 this year. And this has been a scary kind of year for stocks. When the market rebounds out of this inflation/interest rate anxiety phase, it wouldn’t surprise me to see SWTZ get to $3, or even higher. That would be a 22% gain from a basically defensive income play, which isn’t too bad when you think about it.
The same analysis would apply to other dividend-oriented funds.
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