Here’s One Way to Eke More Gains from this Rising Stock Market

Yesterday the S&P/ASX 200 reached your editor’s year-end target of 5,002 points.

We’re somewhat surprised that the index hit this level before the end of February rather than the end of December.

So when the stock market’s going up, who’s complaining? We’re certainly not.

These Stocks Could Be ‘Ripe for a Rebound’

Before you rush out to invest every single cent in the stock market, remember what we told you last week — you shouldn’t try to get the highest possible returns for every single dollar. You first need to allocate your investments according to your attitude to risk. Only then do you look to maximise each dollar.

Most of that is pretty easy. Find a high interest bank account for cash. Find the best term deposit rate. And locate the best bullion dealer for your gold and silver investments.

But maximising every dollar in the stock market is harder. The easy trade since the middle of last year has been to buy dividend-paying stocks. But as well as getting a dividend, investors have gotten a nice bonus with capital gains — the Australian share market is up 14.9% since 16 November.

So, what do investors do now? How can you maximise your stock market returns after shares have already gone up?

The biggest mistake you could make today is to assume there isn’t any value in the market (we’ve just tipped a deep value stock in the February issue of Australian Small-Cap Investigator).

We showed you last week with our Five Beaten-Down Blue-Chips that these stocks are still a long way below the 2007 and 2008 peaks.

But it’s not just beaten-down blue-chips that you should have your eye on. Our good buddy Dr Alex Cowie keeps a close watch on mining stocks for his Diggers & Drillers investment advisory.

One of the sectors he watches closely is the gold stock sector (as do many of the editors here). He keeps close tabs on the Market Vectors Gold Miners ETF [NYSE: GDX]. The Doc says he’s ‘stunned’ that the index has fallen so low, and that it ‘is ripe for a rebound’.

This ETF contains the bigger US-listed gold stocks. As you can see from the chart below, gold mining stocks (blue line) have fared poorly compared to the top 20 ASX-listed stocks (yellow line):

Source: Google Finance

The blue-chip dividend-payers are up 21.3% while ‘blue-chip’ gold miners have fallen 25.6%.

Growth is a Bonus for Income Stocks

Now, just because a stock has gone up doesn’t mean it won’t keep going up. And remember, if you bought dividend stocks for the dividend you should probably hang in there and keep hold of them.

If you’re looking for value, it’s hard to find that in most of the big blue-chip dividend players.

And our bet is you’ll start to see a lot of volatility and sideways movement in those stocks as they reach their limits. ‘Pairs traders’ will look to profit by short-selling over-valued stocks and buying under-valued stocks. They’ll then reverse the trades as the stocks switch places.

But if you’re looking for value and you want pure growth rather than dividends, gold stocks are worth looking at. Just bear in mind that a gold stock isn’t a substitute for a dividend-paying stock. They are two different investments.

If you’ve gotten capital growth from your dividend stocks, treat that as a bonus. But if you’re after some real growth assets, we agree with the Doc, it’s a great time to look at gold and other mining stocks…especially if he’s right about the strength of China’s economy.

And best of all, it may help you build your wealth to combat the government’s latest tax grab.


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