We Got it Wrong With Dividend Stocks…and Investors Still Made Money

Fiscal Cliff, Schmiscal Cliff.

If you ask us, it’s all a load of hooey.

To the extent that we won’t even bother talking about it. But if you’re interested, check out John Stepek’s column in today’s other Money Morning article from the UK.

Off the top of our head, it has probably been two years since we advised you to forget about the central planning goons.

The Fiscal Cliff is just another marketing exercise by the central planners. It’s the latest in a long line of self-inflicted problems designed to show how important the central planners think they are.

Once they’ve self-harmed, they then claim they know the cure. But before long, the next self-inflicted wound appears.

We don’t know about you, but we’re sick of it. But here’s something we’re not sick of…punting on stocks

Not many people will admit it when they’re wrong these days. But it’s something we’re more than happy to do. Why? Because we know we’re not omnipotent…we aren’t all-knowing.

All we can do is make our best guess on things and hope we’re right.

At the end of 2011 we made a bold prediction. We bet that the stock market would be volatile…that it would go up and down, but that by the end of the year it would be no higher – or lower – than it was at the start of the year.

How did we go with that prediction? This picture tells the story:

XJO

 

Source: CMC Markets Stockbroking

As recently as November things were looking pretty good. Yes the stock market was up, but it had turned south, and just a 5% drop from there would make the market square for the year.

But before we knew it – whoosh – the stock market took off and went 5%…and then another 5% the other way. In 2012, Aussie stocks gained 15%.

As a stock investor, that’s great news. We don’t mind getting something wrong if it means stock prices go up.

However, things haven’t been that simple. As you’re probably aware, we specialise in a certain type of stock. The type of stock risk-averse blue-chip investors wouldn’t dream of touching. We’re talking about small-cap stocks.

We Told You to Buy Dividend Stocks…But for the Wrong Reason
 

What we’d love to tell you is that small-cap stocks have had a great year too. We’d love to tell you that small-cap stocks beat blue-chip stocks hands down.

But we can’t tell you that. As the following chart shows, while blue-chips went vertical from November onwards, small-caps went vertical too…only in the wrong direction:

XEC

 

Source: CMC Markets Stockbroking

Normally, when stocks take off, it’s the smallest and riskiest stocks that take off first.

That didn’t happen this year. Why? The only explanation that makes sense to us is that as the meddling central planners at the Reserve Bank of Australia (RBA) cut interest rates – which cut the interest rate on savings accounts – investors switched from relatively safe cash, to relatively less safe dividend paying stocks.

The big beneficiaries of this move have been the big banks: ANZ Bank [ASX: ANZ], Commonwealth Bank [ASX: CBA], and Westpac [ASX: WBC]. And other big dividend payers like Telstra [ASX: TLS] have done just as well.

Now, we can’t claim we saw these capital gains coming (Telstra gained more than 30% in 2012, and Commonwealth Bank gained more than 20%), because we didn’t. But we did strongly suggest you have a big chunk of your savings (your ‘safe money’) in dividend paying stocks.

Our bet was that dividend payers would give you a steady income stream while stock prices went nowhere. Turns out – if you followed our advice – you got a steady stream of dividends and capital growth.

One Thing Won’t Change in 2013
 

But don’t get too carried away. We’re still not convinced the stock market is in the middle of a multi-year bull market run. The dividends will still likely flow, but is it reasonable to expect 20% and 30% gains for lumbering blue-chip stocks?

As we say, we’re not convinced.

So we’re making a new bet…hopefully we’ll get this one right. Our new bet is that after seeing big stocks gain, this should give investors and punters more confidence in stocks.

As investors and punters gain confidence, they will be more likely to look for stocks that offer the chance of even bigger returns.

In some ways this is a human reaction rather than a stock reaction. Frustrated at missing out on the recent gains, many investors and punters will try to make up for the missed opportunity. That means taking bigger risks…and for big risks, nothing beats small-cap stocks.

Of course, nothing is certain…except one thing: and that is this continues to be a risk-takers market, and it’s likely to remain that way for the foreseeable future.

Cheers,
Kris

[Ed note: for our sins, your editor owns Telstra shares.]


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read. Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


Money Morning Australia