FYI | Apr 13 2016
By Peter Switzer, Switzer Super Report
It’s time for some tough love and this was driven by my own pining for normal market conditions, which would see stock market indexes head up over the course of this year. But markets don’t really conform to history consistently and when we say stocks will rise 10% per annum over a 10 year period where half of that return comes from dividends, with two or three bad years, that’s ultimately a generalization based on history and the averaging that comes out of that.
So, if you aren’t happy with your returns the first person to blame might be you if you run your own share portfolio. It’s possible you have not constructed the most appropriate portfolio of assets and so you are too vulnerable to the ups and downs of stock markets.
Let’s look at our past 10 years going back to April 2006 and the index was at 5,192 and we’re now at 4,937, so we’ve lost 255 points in 10 years! Let’s call it line ball but we have made at least 5% per annum from dividends and with franking credits you should be up 6-7% per annum, which is pretty damn good.
Sure 7% is not 10% but let’s change the 10-year period and assume you started your SMSF and share portfolio construction in March 2009 on my behest. Assume you bought a portfolio that matches the S&P/ASX 200 index then your portfolio would be up about 60% on capital gain and seven years of dividends and franking, so you’d be up 100% or so or 14.2% per annum, despite our pretty ordinary market. And if you’d selected greater dividend-payers your return would’ve been higher!
If I’d written this in March last year when the index nearly hit 6,000, the return would have been greater and more like 18.8% per annum then!
Your starting point is important to your returns but the stocks you have in your portfolio are more important and there is a strong case that you should have great dividend-payers, with a great history of doing that.
Companies such as Suncorp (SUN), AMP (AMP), IAG (IAG), Sydney Airport (SYD),Transurban (TCL), Coca-Cola Amatil (CCL) have been great dividend payers and are the sorts of companies worthy of consideration when share prices are down, like they are now.
Sure some have been bought by other dividend-collectors as they are defensive stocks and so they have not slumped like others but financials are pretty beaten up right now, so the future with these sorts of stocks could not only deliver dividends but capital gain.
The key question right now is where do stocks head? The bears are lining up with the bulls and the bear line-up is becoming more numerous. I mentioned on Saturday that Bloomberg raised the question about whether Arrium was a part of a chain of failures added to Slater and Gordon and Dick Smith that could hurt our banks and justify recent sell-offs! I hope and think they’re wrong but the sentiment won’t help the overall market.
I really can’t see the makings for a market takeoff right now but I think a period of consolidation is likely for the US market, which will set the tone for our stock market.
In coming months we have US earnings season which has been tipped to be ugly but it could surprise positively with the outlook statements on a lower greenback important for many corporate bottom lines.
Economic readings from the US, China, Europe and Japan could send stocks up or down and there is no clarity on even the US economy with GDP growth recently marked down to under 1% but recent data looks more promising for future quarters.
Then there are Fed and European Central Bank decisions with negative interest rates from the latter causing some concerns.
The April 17 OPEC and non-OPEC oil producers meeting in Doha, Qatar could hurt or help oil prices and these directly impact on stocks. Adding colour and concerns are issues such as Brexit and Donald Trump.
If all of the above turn out with positive implications such as an oil agreement, better than expected earnings as well as economic data, Trumped is trumped and the Poms stay in the EU, etc. then stocks would head higher but there’s a lot of “ifs” in there.
US economist Ed Yardeni is not bearish as he holds high hopes for “the fairy godmother of the bull market” — the Fed’s Janet Yellen. He thinks she is likely to hold the market’s hand by raising interest rates Goldilocks style — not too fast, not too slow but just right! I hope he’s right.
It’s possible that markets could go down further but I will be a buyer at lower levels because I have a longer time period for stocks.
If Armageddon is around the corner then current stock prices aren’t good value but a lot of our top 20 stocks have been really beaten up over the past year, so if good news prevails in 2016, then we could see a reversal of fortune.
And given they are Australia’s top 20 companies there’s gotta be some good value in them for the long-term investor who primarily is happy with dividends annually but is also really happy to pocket capital gain when it comes along.
Whether you access it is all up to you.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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