Reinvesting dividends – RIO and US exposure

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Some companies offer Dividend Reinvestment Plans or DRPs. Investors who take up this option forgo the standard dividend cheques. The main advantage for ‘small’ investors is that there is no brokerage or administration fee associated with the purchase.

In this way, an investor can steadily build up his or her holding over a period of time. The downside – for me – was all of the extra paperwork when I sold the stocks to determine capital gains tax. Another negative, for my part, is that one agrees to buy the shares without knowing the price.

Strategy

I treat my dividends and any new cash in the same way. I like to accumulate sufficient cash to make a share purchase cost effective. I then use my measure of exuberance – which I publish each week on my website – to look for sectors that are cheap.

In between rebalancing dates, I typically buy more of any of my existing stocks that happen to be in a cheap sector. While that temporarily unbalances my portfolio, I prefer to take what I anticipate to be a relatively quick capital gain.

Obviously, if I had a substantial new amount of cash from, say, the sale of an investment property, I would seek to bring forward a full rebalance. If no sector is cheap, I leave the excess cash where it is until opportunities arise.

As share prices evolve at different rates, the value share for each stock departs from the original weights. This unbalancing is fine under normal conditions but really big swings in price might necessitate an early rebalancing.

Sector view

To take an example, I set out the exuberance statistics for last Friday’s close in Table 1. Discretionary is the cheapest, being underpriced by 3.1%, but I don’t own any stocks in that sector (I haven’t yet rebalanced my portfolio into my yield play). The adjusted capital gains forecast of +16% would otherwise attract me.

Sector statistics

 


Source: Thomson Reuters & Woodhall Investment Research

JP Morgan just upgraded the mining sector to overweight, but Macquarie is underweight and Goldman is neutral. The gains’ forecast is not strong for materials, but I might otherwise top up RIO, which looks a little cheap.

Although Atlas and Mount Gibson look to have been sold off too much, perhaps this is not the time to dive into smaller iron ore plays until there is more clarity on the ore price.

With the Budget focus on healthcare, it may not be the time to get into that sector until it is clear what will get through Parliament. I still hold and like Cochlear. Industrials – although not cheap at +0.7% – attract me with a strong gains’ forecast and only minimal overpricing. Those stocks with exposure to the US growth story are of potential interest but telco and Utilities are a bit on the pricy side at the moment for me.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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