Call me crazy, but last week I added Woolworths Limited (ASX: WOW) shares to my family's portfolio…
Subsequent to the release of its half-year results, its shares have been crunched.
It's fair to say, it's been a wild ride.
Full of analyst downgrades, bearish financial media and, now, an ACCC investigation into its profit margins.
Fear has entered the room…
However, for the shrewd value investor with a long-term outlook, Mr Market's 12% selloff over the past 10 days has afforded us an opportunity to get into the stock at a price which isn't demanding.
Talk about looking a gift horse in the face…
Now, I'll admit, my purchase price of Woolies shares was only slightly below fair value.
Even so, I'm a happy camper.
Usually, I require a much wider margin of safety. That is, I like the difference between what I think a company's stock is worth and what I can buy it for, to be as wide as possible.
Anything less than 20% doesn't leave an investor much breathing space.
However with leading economists – such as those at ANZ – saying there's a possibility interest rates could hit just 1.75% in 2015, and an above-average valued stock market, I wasn't prepared to knock back such a golden opportunity.
And as Warren Buffett says, "It's far better to buy a wonderful business at a fair price than a fair business at a wonderful price."
Woolworths has proven itself to be a wonderful business – its annual dividends have risen from just 25 cents in 2000, to $1.36 in 2014.
I've also hedged my bets, by buying in parts.
So far, I've bought around 33% of the total value of shares I'd be comfortable holding.
I'm not gambling on short-term price movements…
At $29.71 per share (the price I paid), I've allowed myself some flexibility. If the stock price falls from here, I'll keep buying – lowering my cost base.
If it stays where it is, I'll keep buying…
And if it goes up? Winner winner, chicken dinner!
But why did I buy Woolies shares for my family's portfolio? I hear you ask.
Firstly, Woolies has a reliable dividend yield – tipped to be 4.6% fully franked (6.6% grossed-up) in the next year.
Secondly, it has a strong competitive advantage.
I agree, Woolies (and Coles) will be affected by the growth of supermarket giants Aldi and Costco, over time.
However Woolies' sophisticated supply-chain, buying power and store locations afford it a robust competitive advantage.
Its recent announcement to invest $500 million for future growth is great news for long-term holders like me.
Finally, Woolies boasts defensive earnings. As noted above, low interest rates are here to stay.
Low rates are a sign of a struggling economy, not a strong one.
Prominent London-based hedge fund manager, Crispin Odey, told AFR on Monday that he believes Australia could be headed for a recession.
If that's the case, I'd want Woolies in my share portfolio because its defensive earnings will continue to power its steady, tax-effective, dividend stream.
As our resident dividend expert, Andrew Page, lead advisor of Motley Fool Dividend Investor, told Take Stock readers in February, "Despite the ups and downs of the share market, despite wars and economic calamities, despite the introduction and reinvigoration of intense competition, and despite the occasional corporate misstep, Woolies has continued to throw off steady, and ever increasing dividends."
But if you thought the 2.5% interest rates on a term deposit from one of Australia's big banks were bad, just imagine what it'll be like when they're offering only 2%, or less…
Let's just hope inflation stays at 1.7%, or goes lower.
Because by the time you factor income tax into the returns, term deposits holders could actually be losing money, from a purchasing power perspective.
Not me though.
I'll stick with my Woolies shares, taking advantage of any favourable downward price movements and wait for those juicy fully franked dividends to roll in.
Finally, with The Australian Financial Review today reporting analysts at Goldman Sachs have downgraded big bank stocks (it's about time), Woolies may just be the elixir to low interest rates that you've been waiting for…
Sick of the poor returns from term deposits and savings accounts? Get our best deal on Motley Fool Dividend Investor today!
