The constant and noisy focus on share market indices has always left me cold.
There are plenty of people who make money from trading stocks and other investments based on prevailing market values. I’m not one of these people and find this approach stressful.
There’s a larger cohort of people who make good money predicting where they think the markets and specific investments will head over the following months and years. I’ve often wondered if these people are as accurate as the seven-day weather forecast.
I prefer to purchase quality assets that have a proven history of paying good income that increases with inflation. As I’m many years from retirement, I reinvest any investments earnings into the same or similar investments to earn more of the same.
I’ll admit it’s a boring way to invest but it works for me.
It’s logical to assume that as investment income from a particular asset increases, then at some stage, someone will want to pay me more for that asset than I originally paid for it. The problem is that you can never predict when you’ll be offered the “right price”.
There are several practical problems with my simple approach. When the market value of investments is falling, it takes quite a deal of fortitude to look the other way. Secondly, when you begin investing as I’ve described, and you eliminate the need to follow the up or down movement of various financial markets, then investing can seem rather dull because not much happens for most of the year. The only occasional activity involves the payment of investment income and a decision of where that income and new monies should be invested.
Another problem is that you can only follow my investment approach if you make a deliberate decision to eliminate many years of indoctrination that has planted itself into your brain by financial market gurus, such as share brokers, investment managers and fund managers.
The upsides to this approach for me are that it works, it also allows me to get on with all the other aspects of my life and it’s cheap to implement. I also reckon it’s simple.
This chase for income is real and is being noticed be various commentators.
Credit Suisse Australia Report
Recently Credit Suisse Australia published a report about SMSFs titled “Rise of Selfies”.
The report paints a picture of small investors almost “terrorising” large company directors into paying out more profit as dividends than would otherwise be ideal. (I digress, but nowhere in this report is the issue of companies wasting their shareholders retained profits on poor investments discussed, or even acknowledged.)
Credit Suisse says SMSFs have a preference for the banks and Telstra because they’re household names and have a tendency to increase dividends from year to year. Based on my review of Telstra’s dividend history, I’m not sure you could argue that its dividend payments have kept pace with inflation over the last 12 years.
The dividend run-up phenomenon
As if to offer another twist to the chase for yield, it’s often been noted that some stocks show an unusual share price increase (compared to the rest of the market) between leading up to an announcement of their earnings, the dividend announcement and then becoming ex-dividend.
Obviously, this phenomenon doesn’t happen all the time and often only with large listed Australian equities.
Macquarie Bank has launched a product to take into account this occurrence – called the Dividend Run-Up Fund – and, as part of their marketing, produced this interesting graph to show what can sometimes happen with some stocks:
Source: Macquarie, Bloomberg
Their strategy in this new product is to invest in S&P ASX100 All Ordinary Stocks where a price trend can be identified. Typically, this is liquid, high-dividend yielding stocks.
The return from the investment comes from the payment of the dividend as well as franking credits and potential capital gains on the increase in the market price of the share. Macquarie overlays a hedging strategy with the fund’s investments to reduce “the fund’s exposure to stock price falls and stock price increases”. This “downside” protection obviously comes at a cost.
The fund has an unusual before-fee benchmark:
- 30% of the S&P/ASX100 Accumulation index.
- 70% of the UBS Australian Bank Bill index.
The portfolio is rebalanced every month and typically holds a small number of stocks and cash.
Macquarie charges a fee of 1.335% per annum as well as buy and sell spreads of 0.3% each. The rules of the fund allow a variable buy spread to be charged.
This new product was released to the market in mid September 2013. You can find out more about the Macquarie product here [1] and to see a Private Binding Ruling from the ATO on this product click here [2].
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.
Also in the Switzer Super Report:
- Charlie Aitken: Bank on it! [3]
- Fundie’s favourite: Macquarie (MQG) – well placed to benefit [4]
- Roger Montgomery: REA Group offers some upside [5]
- Staff Reporter: Buy, Sell, Hold – what the brokers say [6]
- Penny Pryor: Short ‘n’ Sweet [7]
- Questions of the Week: Bank fear and when to buy ETFs [8]