Why Dividend Stocks May Not Stay This Cheap for Long

Phew! What a punishing second half of March.

There’s blood on the streets everywhere.

Investors are crying into their cheap beer.

And many are wondering if the stock market will ever go up again.

Oh, hang on a minute, it wasn’t that bad. Yes, the Australian market is 3% below the recent peak reached on 12 March. But seeing as the market is still 25% higher than it was last June, we’ll take that any day of the week.

The question is: are you still in the market or have you been spooked out of it?

Either way, here’s what to do now…

We’ll admit something. We told Pursuit of Happiness readers earlier this week that the Cyprus savings grab had spooked us.

It made us reassess our cash savings and whether we’re better off switching some of that into gold. We figured out that yes, we would be better off with more gold, so that’s what we’ll do.

But the one thing we didn’t do during the height of the Cyprus crisis was to change our view on the stock market.

Safer Than Cash?
 

That may seem strange. After all, in the event of a crisis isn’t it natural to sell risky assets and buy less risky assets? Well, yes, that’s true.

But the way we’ve come to think about it (and we don’t think we’re the only ones to come to this conclusion), we’ve got more faith in the ability of Australian companies to weather a financial storm than we have in the banking sector to weather a bank run.

That’s especially so when, as we also pointed out to Pursuit of Happiness readers, a bank like Australia & New Zealand Bank [ASX: ANZ] only has $75 in cash and coins in reserve for every $10,000 of deposits (that’s less than 1% by the way).

How do you think you’ll go getting your cash out if there’s a run on Australian banks? Enough said.

So, we’ll take the stock market any day of the week. That doesn’t mean you should ditch all your cash. But you should know the risks. We know the risks in shares, but just as importantly, we know the rewards.

And as the chart shows, a 3% drop…big deal:

 

Source: Google Finance

 

You know our style. We’re not a shill or a spruiker for the stock market. If we thought things were bad – really bad – we’d tell you to sell.

But right now we figure the Aussie market has settled in for an extended period of volatile, but ultimately, sideways action. In fact, we doubt if you’ll start to see the market challenge the March high again until the last three months of the year.

For what it’s worth, just remember we tipped the market to end the year at 5,004 points. It hit that mark in February, and who knows, with the volatility, it’s still looking like a good bet to end the year at that level.

But this is exactly why we’re buying stocks, and it’s why you should too…

Big Investors ‘Game-Hunting’ for Yield
 

We’ve laid out our stall to say that it’s a great time to buy growth stocks. We said that a few weeks ago as stocks hit the peak. To us, dividend stocks looked overvalued at worst and fairly valued at best.

But as we showed you in last Friday’s Money Morning, the recent sell-off has presented an opportunity to fill up on a few dividend stocks. We used AMP Ltd [ASX: AMP] as an example. And what do you know? It rallied 4.6% on Wednesday, recovering about half of what it had lost since February.

This isn’t, and won’t be, an isolated case. Investors will scan the market for yields. They’ll look to pick up any unfairly sold off stock. That should see dividend stocks gain over the next few weeks.

So although the best opportunities for gains this year will come from growth stocks (especially the ones we focus on in the small-cap market), you’d be a mug not to take advantage of the opportunity to use incoming cash flows to top-up on your dividend stocks.

You shouldn’t expect to see the kind of capital growth gains you saw in the previous six months. But if you can get 4-5% gains, plus a 4-5% dividend yield, well, that isn’t a bad return on what most still think of as a super high-risk market.

Cheers,
Kris

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From the Port Phillip Publishing Library

Special Report: Australia’s Energy Stock BLOWOUT

Markets and Money: In Gold, Not Cyprus, We Trust

Money Morning: Silver ‘$100 Within Two Years’

Pursuit of Happiness: Safer Than Cash – Gold Regains Its Rightful Place

Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks


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.


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