A 23% range.
For two and a half years, the ASX200 has been stuck in a 23% trading range…
What’s bizarre about this is that we are living in some of the most tumultuous times on economic record. Surely markets should be on the move. Somewhere.
Then again, the ASX200 is down 25% over the last 5 years, 7% over the last two and 10% over the last year. That’s something. But probably not what you were hoping for.
It’s interesting to see how a couple of the editors of our newsletters here at Port Phillip Publishing have coped with the short-term volatility and long term boredom that comes with a market that just won’t trend. We have our solution figured out, but let’s look at them first.
Australian Wealth Gameplan editor Dan Denning told his subscribers about an overlooked investment plan that benefits from all types of environments. Inflation or deflation, financial crisis or boom. The idea is that you have to worry less about what’s going on. That means having fun speculating with small parts of your wealth dedicated to it.
Two of Dan’s picks are up 241% and 198% in seven months!
Meanwhile over at Sound Money. Sound Investments the solution to market monotony is steady, systematic and measured.
In the face of extreme uncertainty, Greg Canavan focuses on the prospects for individual companies for his tips. This value investing idea is simple – value a company and then judge whether the market price is above or below that valuation. With a sizeable margin of error and a conservative valuation, investors can buy undervalued stocks and avoid overvalued ones.
This is Warren Buffet style investing…. It works.
Investing For Income Using Share Dividends
Here is by far the best strategy in times of volatile but sideways markets – invest for income. In the stock market, that means share dividends. Where can these dividends be found? Well, back in October, we wrote about a pair of cashed up stocks for AWG subscribers.
These two Aussie health care companies are global players in their field: Cochlear Ltd (ASX: COH) with its hearing aids and CSL Ltd (ASX: CSL) with its range of healthcare products, like anti-venoms and plasma therapies.
Here is why we wrote about the stocks in AWG:
Steadily rising share dividends. In the face of serious turmoil in their export markets, these companies are dedicated to growing their share dividends. That means cash flow at a time when your stocks are flat lining. Over time, these share dividends could grow to impressive yields on your initial investment.
Of course, dividend stocks become more popular as their share dividends rise and investors get sick of watching their growth stocks fluctuate in and out of gains. With interest rates expected to fall in Australia, it makes share dividends even more attractive.
That means dividend stocks can actually rise and do better than growth stocks. Simply because investors are prepared to pay a higher price to secure share dividends…while growth stocks do nothing. Here’s how COH and CSL performed since they featured in AWG:
Cochlear’s performance has been particularly good because it resolved the cause of a product recall. The stock had tumbled previously, making it a great opportunity at the time.
That’s the point of share dividends. You get the potential upside from capital gains. But you also get an income in a flat market.
Think about it this way. The market can move three ways. Up, down and sideways. Share dividends can give you a return in all three of those markets – capital growth and income in a rising market, and income in a falling or sideways market. Not many other straight-forward investments do that.
The last big benefit of share dividends is a little trickier to grasp. Both savings accounts and dividend stocks can experience compound growth – if you reinvest the gains.
Share dividends of good companies can rise in nominal terms to much higher levels than interest rates. Especially adjusted for inflation.
Here’s what we mean. If you had bought one share of COH on the 7th of January 2000, at $18.80, it would have yielded almost 12% in cash dividends for you last year. Its price is also up more than 200% in that time. Imagine an investment that steadily yields 12%, and is steadily increasing its yield each year as well. In terms of cash flow during a flat market, that’s invaluable.
If you add in reinvested share dividends over the twelve years, or add just how much cash you’ve received since buying the share in 2000 ($14.53), the returns are even better.
What to Look For in Share Dividend Dominators
So, how can you get in on the action of collecting share dividend cheques while your stocks go nowhere? Here are a few pointers to look for:
- Yield – how much the dividend is as a percent of the price
- Growing dividends – has the company been increasing dividends steadily?
- Debt – can the company survive tough times
- Buying opportunity – wait for the right moment to pounce, like a product recall or a management scandal which causes the price to drop temporarily
It’s pretty simple.
We’ll have more to say on this, including a powerful way to ramp up share dividends even further, at the Port Phillip Publishing Symposium in Sydney.
Nick Hubble
Editor, Money Morning
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February 28th, 2012 at 1:37 pm
Coping with the short-term volatility and long term boredom that comes with a market that just won’t trend—how about waiting in the sidelines and not being afraid to do nothing and learn? No activity at some point can be a strong move-about. Then, pounce when the right time comes.
February 28th, 2012 at 5:36 pm
Legendary Olympic sailor Paul Elvstrøm was winning a lot of races in his younger days. For one whole year he completely stopped sailing and stood on the shore watching his competitors.
The following season he was back in competition and just about unbeatable.
He always commented that the year off observing was what gave him the edge.
February 29th, 2012 at 9:14 am
If I’d sold my share portfolio on 31st December and put the money in the bank I’d have roughly 1% more courtesy of the interest. My portfolio is up 16% (+dividends) in those 2 months – despite a 20% fall in one stock that I am a little over weight in.
Everything you do has a risk – doing nothing is just as risky as trading.
I’m no guru but I’m doing much better since I sacked my full service broker.
Whilst at times, I am critical of the MM team I acknowledge good gains from 2 stocks bought on Mr Sayce’s recommendations.