There’s a lot of journalist talk around at the moment, which really is simply messaging from fund managers, and these ‘experts’ are telling investors that you are taking a risk in chasing yield or dividend-paying stocks.
I’d like to say “what a load of crap!” but that would be as presumptuous as the scribes. They are simply relaying fund manager preferences that are set to chase big capital gains over the rest of this year and probably into 2015.
My more gracious and better reply to these comments about risk, is to say: “Chasing yield? Who do you think you are?”
Looking after your interests
Being not only an economist and a personal investment commentator but also a financial adviser, I know I have to ask my clients about themselves and their goals to make sure the plan we create covers off on their really important aspirations.
So, what I am saying, is that if you are a relatively young SMSF trustee, trying to build up your wealth, you might be more inclined to chase high returns. You might get involved in this rotation by many fund managers into stocks that could spike higher in an improving economy, with a lower dollar and lower interest rates.
But this comes with a risk and remember history suggests that two-thirds of active fund managers don’t beat the index! And let’s go further with history and recall that over a 10-year period a portfolio that closely matches the index should do 10% per annum, despite the possibility of there being three or four bad years in the ten!
But wait there’s more.
Around 50% of this return is made up of dividends but this return is reduced by the fact that the index has a lot of poor dividend payers.
So, for lots of SMSF trustees, creating a portfolio, which has a great correlation with the index, for example Paul Rickard’s dividend portfolio [1], which returned over 24% last year, makes a lot of logical sense.
However, it means it is unlikely you will beat the index this year if it spikes, as I expect, on the back of cyclical stocks, which might be pretty ordinary dividend-payers.
Don’t seek thrills
If you’d followed this strategy, you would be pretty relaxed about your fund under-performing, because you have built it for reliable returns in good times, such as a great 10% plus. Of course, you won’t do as well as the thrill-seekers, who’ve taken the journalists’ advice to reduce exposure to quality dividend stocks to chase big price-rising stocks. But in tough times they will cop it, big time, while your stocks will keep on giving a nice yield in tough times.
The CBA example
A couple of weeks back I saw Commonwealth Bank (CBA) at around $72.74 and if you’d dived in then, you would have made 3% plus the yield of say 5%. With the grossing up effect and you’d be on the way to 10%. And by the way, I wouldn’t be surprised to see CBA at $80 this year some time but I don’t care if it doesn’t get there, as it has been a great stock for someone like me with a SMSF.
So a conservative investor could easily rest easy with great dividend payers and would not have to run away from them, nor buy more at high prices. They could always buy more when the market slumps because they are great companies you want to hold for a long time.
If you know yourself and you like to play the market for some extra grunt, then you might allow 10% of your portfolio to be played like a fund manager, buying on dips, chasing the trend, using stop losses, as well as options and trying to time the market.
Market timers
History shows market timers have a low success rate and those who buy when the market is at all-time lows and stay for the long-term have a much better win-record.
I don’t punt with much of my SMSF money, as I am always looking for good value dividend-paying stocks but hell that’s me and I know who I am, at least, investment-wise!
However, as I say, that’s me but it won’t stop us at the Switzer Super Report trying to pick the companies that look poised to do well and it won’t stop me telling you that, if you are a “go to cash” type, then the market looks scary when it is. That’s my job.
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.
Follow the Switzer Super Report on Twitter. [2]
Also in the Switzer Super Report:
- Penny Pryor: Shortlisted [3]
- James Dunn: More strong earnings on the cards [4]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [5]
- Paul Rickard: ANZ’s new hybrid security [6]
- Brittany Ruppert: Auction clearance rates up, up, up in a seller’s market [7]