With a gross dividend yield of 12%, this set-and-forget portfolio should reward investors well in the years ahead, writes The Motley Fool
A simple path to financial wellbeing
I recently pleaded with investors to avoid the overpriced Australian property market. Now, as promised I'll outline one strategy that both I and the funds management star, Peter Morgan, believe will put you in front.
Peter Morgan was the brilliant fund manager of 452 Capital. He was recently featured in the Australian Financial Review giving advice so wise it was Foolish – note the capital F. We'll come back to Peter and his advice in a moment.
Champagne for the price of cheap sparkling wine
You may recall that I attended a wedding recently. Upon hearing I was an investment analyst, one guest suggested that these must be tough times for me.
Without hesitation I replied that these are the investing times I live for. I absolutely love bear sharemarkets as they give me the opportunity to buy fantastic companies at bargain prices.
It's like buying French champagne for the price of Asti Spumante. OK that might be a stretch, but you get the idea.
I was aware of possible confirmation bias as I swigged on Peter Morgan's advice. I may have even squealed with delight when I read his wise words, "I like these sort of markets. They provide opportunity – and what tends to happen is the baby gets thrown out with the bathwater."
Look beyond tomorrow's headlines
While global financial markets have many pressing problems, those able to look beyond tomorrow's gloomy headlines should profit.
Peter went on to say. "I firmly believe that if you take a three-year view, and pick up a good portfolio of stocks bought in these down times that are yielding around 4 or 5 percent – and they all are – then in three years' time you'll be in front."
I totally agree. With markets down and yields up, now is the time for conservative investors to create the cash generating portfolio that should be at the core of their equity portfolio.
Rules of play
Before diving into the five companies I think will put a smile on your dial for years to come, we need to establish some rules.
1. Now does not mean today. Now means while global financial markets continue to deteriorate. Patience is priceless when it comes to the sharemarket. Spread your buys over the coming months.
2. Once you buy one of your favourite cash cows, forgetabouit. The point of buying these companies is so you don't need to worry about daily sharemarket wiggles. Volatility is an investor's friend. It has little to do with risk.
3. Dividends, not capital growth, have delivered the majority of Australian sharemarket returns over the last hundred years. OK, that's not a rule. But it is a fact that must be embraced as a core belief.
The set and forget cash flow portfolio
Opportunistic buying of the following five companies this year will beat money in the bank. Heck, despite what I said about patience, buying these companies today will outperform money in the bank for years to come.
Telstra Corporation Limited (ASX: TLS). Despite out-performing the market over the last year, Telstra remains my number one high yield pick. Telecommunications will be a growth industry for years to come and there is no bigger brand than Telstra. With Telstra's refocus on customer acquisition and satisfaction, shareholders could get some capital gain to bolster the 13% gross yield.
QBE Insurance Group Ltd. (ASX: QBE) sold off again last week, despite offering a mouth-watering 11% gross yield. Yes QBE has problems, especially with U.S. Treasuries, but even if its dividend was slashed in half, the yield would still be pretty decent.
Westpac Banking Corporation (ASX: WBC) is my favourite placeholder for any major Australian bank. Any deterioration in Europe could see banks undeservedly revisit the ludicrous lows set during the GFC. Investors should be alert, and back up the truck to load up if that opportunity arises. With a gross yield of over 11% your money is better on the banks than in them.
OrotonGroup Ltd. (ASX: ORL) is the miser of this group, though with a 9% gross yield, one of the best management teams in Australian retail and plenty of growth opportunities, Oroton deserves a place as the growth kicker on this team.
Hunter Hall International Ltd. (ASX: HHL) edged out the better known fund manager Platinum Asset Management (ASX: PTM) for the final place in the starting line-up. Hunter Hall trades at a huge discount to Platinum on most metrics – price to asset under management, price to each dollar of earnings and importantly price to dividend. With a gross yield closing in on 16%, Hunter Hall investors will be well rewarded in the years to come. It's time to scoop up shares of this value investing manager at value prices.
Foolish Bottom Line
A portfolio of these five cash generating powerhouses delivers a trailing gross yield of around 12%. While dividends may fall this year, a sensibly selected portfolio of high dividend paying shares should increase its payout over the long haul. Investors who are able to focus on the long term and patiently accumulate shares during this bear market will be well rewarded in years to come.
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Dean Morel is The Motley Fool's Investment Analyst. Investing is best viewed as a business. Dean holds positions in Telstra and Hunter Hall to provide the cash flow his investing business requires. The Motley Fool has an enterprising disclosure policy.