Rudi’s View: Best Buys & Smaller Cap Favourites

Rudi's View | Dec 12 2024

Today's update includes:

-Dividend Investing, The Smart Way
-Focus On 2025
-Best Buys & Conviction Calls

By Rudi Filapek-Vandyck, Editor

Dividend Investing, The Smart Way

Back in 2011, I researched and wrote up a case study comparing retailer David Jones to Super Cycle Beneficiary Rio Tinto ((RIO)) and asked investors the following question:

You are allowed to go back ten years but you can only buy one of these two and you have to hold the shares for the full ten years, which one do you choose?

Most investors would choose Rio Tinto, of course, and take the underperforming option. As it turned out, David Jones paid out Rio Tinto's total return in dividends over that period, with the capital appreciation, which was significant, the proverbial cherry on top.

The 'secret' is to find a decent dividend paying company that has a lot of growth potential while cyclical companies like Rio Tinto, well, they are cyclical with lots of ups and downs along the way, even when supported by a Super Cycle.

Not everyone might have understood the message at the time, but the key lesson for investors is to not solely focus on the 'yield' that is on offer, but equally consider the quality and reliability of earnings that support the dividend, as well as 'growth'.

Investors in Australia, on my observation, often forget to pay attention to growth.

The key lessons from that exercise were later applied to the local banking sector in an FNArena Special Report titled Dividend Investing, The Smart Way which is available for paying subscribers via the Special Reports section on the website: https://fnarena.com/index.php/analysis-data/special-reports/

The reason as to why I am remembering all of this is because analysts at Wilsons published a similar case study this week, comparing TechnologyOne ((TNE)) with National Australia Bank ((NAB)) and the numbers are equally surprising.

Back in 2009, Wilsons recalls, both stocks looked cheaply valued offering a yield of circa 5%, but one was a great buy and the other not so. Investors who bought $100,000 worth of TechOne shares 15 years ago and held on to them up until today would have received the princely sum of $25,000 in dividends just this year.

Those who put that money into NAB shares instead saw the bank paying out no more than $6000 in 2024.

The difference is because one has had consistent double-digit growth over that period, the other has had hardly any growth. Compare the pair, as they say.

Taking the lessons from that exercise on board, Wilsons has screened the ASX for the better dividend investments a la TechOne instead of NAB, starting with a minimum grossed up yield greater than 3% on FY27 forecasts.

That screening led to the following 18 companies, which does include a number of cyclicals (but then Wilsons' horizon only stretches out to FY27):

-Santos ((STO))
-HealthCo REIT ((HCW))
-Super Retail ((SUL))
-Telstra ((TLS))
-ANZ Bank ((ANZ))
-Rural Funds Group ((RFF))
-Collins Foods ((CKF))
-South32 ((S32))
-Coles Group ((COL))
-Ridley Corp ((RIC))
-Worley ((WOR))
-Transurban ((TCL))
-Steadfast Group ((SDF))
-The Lottery Corp ((TLC))
-Scentre Group ((SCG))
-Sandfire Resources ((SFR))
-Macquarie Group ((MQG))
-Car Group ((CAR))

In a different document, Wilsons strategists offered the following assessment of Australian equities for the year ahead:

"[...] the local sharemarket is at risk from over-optimistic valuations relative to the tepid growth outlook. We continue to focus on companies with company specific growth drivers (often global)."