FYI | Nov 30 2016
By Peter Switzer, Switzer Super Report
If you are an investor who likes an 8% yield or even more from quality companies, then you should be keeping your wits about you, though it might be wise to pick your timing.
However, even if your timing is not your strong suit, and it’s something that escapes a lot of us, then I still think the dividend-driven investor is set to be given what they want — great, reliable yields.
For the past few months since growth stocks became the market darlings and interest rate or bond proxies were dumped, I’ve been arguing that if you really want your super portfolio of stocks to deliver solid yields, most of all, then you should be a contrarian and be ready to pick up some real bargains.
The more and more I play this game I get convinced that for the investor who has got time on his or her side, being a contrarian with quality companies makes a lot of sense. Regular readers know I pondered if BHP-Billiton was a good buy at $14.20 for someone who didn’t get cranky waiting for the companies’ share price turnaround. I also made the point, every time Paul Rickard showed us charts of how well small caps and companies listed 51 to 100 on the S&P/ASX 200 index had done and how badly the top 20 had performed, is it not time to support our biggest companies? They were relatively cheap and even if you mistimed the buying of them, you still have good assets that pay a pretty good collective dividend.
But I do say, even if you buy my logic, it could be a good idea to be wary of acting this week. You see, the next seven days bring at least two challenges for the stock market.
OPEC happens to be meeting in Algiers on Wednesday, so there still could be some news that could help or hurt the market.
The second is the Italian referendum to be held next Sunday. If both get-togethers don’t work out well, stocks will dive and so there could be even better buying opportunities for many stocks.
If eventually OPEC and its mates agree to production cuts, then stocks will rise and growth stocks could be the ones in the frame for key market influencers. Interest rate substitute stocks could be dropped as fund managers and other capital gain chasers want more of their money on the Trump rally.
And if the Italians vote ‘yes’, which the polls say they won’t, then stocks will again go higher. Growth stocks will be given the thumbs up and dividend-payers could be dumped purely because big market players want to cash in on the market rally.
Right now, 2017 is seen as a pretty good year for stocks, and though the experts can be wrong, that’s the consensus opinion. Checking the expert majority view is part of my brief, so I’m duly reporting it.
Of course, suggesting minority contrarian views is also a part of the commission – hence this story today.
Back to this week and the analysis, if the oil decision is positive for the oil price but the Italian vote raises concerns about the viability of the European Union, then stock markets should go negative. You’d have to hope the Trump effect and the oil price rise could reduce the negative impact of a bad Italian result but only a gambler could play this with confidence, not an investor!
So what’s my thinking?
The banks and Telstra (TLS) remain good buys for the next two years whenever their share price dips.
Telstra has to deal with the end of the NBN windfall to make sure the dividend is not savagely reduced but CEO Andy Penn has at least 24 months to come up with something.
Throwing in franking, these stocks are 7% plus plays, so how much argument do I need to produce to win you over?
Why two years? Apart from the specifics linked to Telstra, I think the Trump effect is definitely good for 2017 and we’ll probably do OK across 2018 but I will be looking at the pace of interest rate rises, inflation and economic growth then to make sure that Donald doesn’t go overboard and bring us closer to the inevitable market slump or crash.
Perpetual’s Head of Investment Strategy, Matt Sherwood, who I always see as a conservative market analyst, agrees with me on 2017 and 2018 but he’s not too negative on the latter, which surprised me, though he agrees we will have to become watchful then.
Right now, great news will be good for growth stocks and because US banks are seen more as these types of shares, our banks will be beneficiaries of Trump and positivity towards growth. If we get good news out of oil and Italy, their share prices should undoubtedly spike.
Really bad news this week makes them a good buy for when any oil or Italian news becomes less worrying, as it generally does. What I’m saying is that if the share price falls, they would be a buy but there could be a waiting period before you’re happy with the play.
The lower the bank share price, the better the yield and the more the likely gain for an eventual rise in the share price.
Banks’ share price rises could trail the overall market but when you add in the dividends and franking, they are a mainstay to most portfolios.
Need proof?
Let’s look at the stocks I liked around November 9-11 when the market started to fear but then love Trump and growth stocks were given the thumbs up.
Westpac (WBC) is $31.53 at the time of writing but was $28.92 on November 9 or a 6.4% yield, so let’s call it 8% after franking. Was that a good buy for a yield chaser and who can stand their capital going for a ride occasionally? I think so.
Telstra got as low as $4.78 when Donald frightened everyone, which was a yield of 6.6% so let’s call it 8%.
Transurban (TCL) on November 11 slumped to $9.45, which made this outfit a 5.4% yielder but remember there’s no franking uplift. The company is now at $10.41 but a consensus target of brokers watched by FNArena has the stock at $11.79.
Sydney Airport (SYD) on November 10 went to $5.82 and that was a 5.3% yield. It’s now $6.24 and brokers guess it will see $6.94 in 2017.
And again, a company such as Spark NZ (SPK) is now $3.34 but when it fell to $3.08 on November 11 when Trump-love made so many go after growth stocks, it was yielding 7.7%.
Meanwhile, if you had believed in Bank of Queensland (BOQ) on the fear and loathing day for Donald — November 9 — the yield was 7.7% before franking, so let’s call it 9% plus!
Just imagine if your collection of stocks averaged 7-8% and you can live with the ups and downs of your capital, which goes with the patch called the stock market, then this could be the contrarian time to start collecting.
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.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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