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Rise Up, Dividends

Looks like I spoke too soon….

Just after I hit the send button on Wednesday’s riveting Motley Fool Take Stock free email, I read that Goldman Sachs had withdrawn their prediction of a September interest rate cut.

As you may recall, I did say an interest rate cut next month was a long shot. It seems the boffins at Goldman now agree.

Now Goldman have a brand new prediction, that they “…do not expect the RBA to lift interest rates until the fourth quarter of 2015.”

Yes, Foolish readers, you read that correctly.

The end of 2015. That’s the end of next year. Before interest rates even start going up. And that’s presuming the Australian economy improves from here…

Lucky I don’t make predictions. If I did, I could probably get a job at Goldman Sachs, earning millions. Problem is, I’d be just as wrong as them.

What is clear, however, is whichever way you look at it, low interest rates are here to stay. Position your investments accordingly.

Overnight, US markets soared to yet another record high.

The S&P 500 is closing in on the 2,000 mark. Grab your party hats and get ready for the celebrations.

On Bloomberg, Quincy Krosby of Prudential Financial came up with the quote of the day…

“We’ve had a paradigm where good economic news is bad news, but it’s clear this week that good news is just good news.”

And what precisely is the good news?

  • The economy is improving.
  • Corporate earnings are beating expectations.
  • But interest rates are low, and staying low.

Like he said… good news is good news.

No wonder then that Bloomberg quoted one pundit as saying…

“The market is really in a sweet spot for U.S. stocks…”

Seems we might be in that same sweet spot here in Australia.

Yesterday, strong corporate earnings saw the ASX jump to a fresh six-year high. The S&P/ASX 200 Index is on the up again today, heading inexorably towards 5,700.

Party hats at the ready?

Earnings are on the up. Companies are raising dividends, even in the face of falling profits, as was the case yesterday with AMP Limited (ASX: AMP) and Santos Limited (ASX: STO) today.

Ultimately, the role of corporate boards is to maximise shareholder value. In this low interest rate environment, the quickest and easiest way to do that is to raise dividends. Boards can do dumb things, but they are not stupid.

As Tom Waterhouse would say, “they know what punters want”, and today that’s dividends.

It’s a Dividend Frenzy.

Totus Capital portfolio manager Ben McGarry was quoted in the AFR as saying the trend for higher dividends could continue “… for longer than many expect with investors in a low returning market desperate for yield.”

“Desperate for yield.”

I couldn’t have put it any better myself.

While the music is playing, keep dancing.

So far, reporting season has been kind to my portfolio.

This week, one of my recent purchases — Contango MicroCap Limited (ASX: CTN) — declared a final dividend of 4.6 cents per share, way above its earlier guidance of a minimum of 3.3 cents per share. The stock now trades on a trailing dividend yield of 7.5%.

Put that in your term deposit and smoke it.

Today, another of my holdings, Sky Network Television Ltd (ASX: SKT), reported profit growth of 20%, increasing their final dividend by a very impressive 25%.

But the winner in the “what punters want” stakes was my small-cap stock Infomedia Ltd (ASX: IFM), increasing its dividend by an astounding 34%. No wonder then the stock has jumped 10% higher today.

Now, I’m the first to admit I don’t get everything right.

Gamblers only tell you about their winners, and we know the vast majority of gamblers lose money. 

On that same theme, beware the investor who only brags about their winners.

Investing is about putting the odds in your favour. But there are no guarantees.

You are doing well in this investing game if you have a hit rate of 60% — six winners for every ten stocks in your portfolio.

Put another way, expect losers. Plenty of them. I’ve got them, sitting right there in my portfolio today.

Some are simply timing. Either I have to wait for the company to grow into its valuation, or I have to wait for the market to recognise the value. When it comes to investing, patience is a virtue.

Then there are the out and out mistakes, like the disastrous one I made buying shares in Lynas Corp (ASX: LYC) at $1.

I’ve sold out now, but not before booking a massive 85% loss. On the bright side, my initial stake in Lynas was small. Although painful in dollar terms, from a total portfolio perspective, the loss was barely noticeable.

We all make mistakes, and as mistakes go, an 85% loss is up there.

But there are two even bigger mistakes most investors make…

Mistake #1 — NOT investing in some of the market’s greatest growth stocks.

Take SEEK Limited (ASX: SEK). In 2005, the company floated at $2.10 per share. Today, the shares trade at close to $17.

Three of the most dangerous words in investing are ‘I missed it.”

Yet those exact words were racing through my head as, just under two years ago, Scott Phillips tipped SEEK exclusively to Motley Fool Share Advisor subscribers.

I passed on SEEK. I passed on the 155% gain in SEEK since Scott’s tip. It was a disastrous mistake, much bigger than my Lynas shocker.

Thankfully I didn’t make the same mistake with another of Scott’s tips — his August 2012 tip is now up 218% for Motley Fool Share Advisor subscribers.

I’m on board, for the long-term, especially as Scott recently re-tipped the stock, even after it’s great run. Now that’s gutsy. Time will tell, but so far so good, the stock is up 12% from his re-recommendation.

Mistake #2 — Selling too soon.

The temptation would have been to sell SEEK along the way, banking some profits.

I don’t blame anyone for doing so, especially if one holding really starts to dominate your portfolio.

It’s a nice problem to have, of course.

But the best course of action was to simply hold on for the ride. Cut your losers. Let your winners run, and run and run.

It’s a popular question on our brand new Motley Fool Share Advisor subscription-only discussion boards…

When do I sell?

For our answer, and for the final word, we take a leaf out of billionaire Warren Buffett’s playbook…

“When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.”

 

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Of the companies mentioned above, Bruce Jackson has an interest in Contango MicroCap, Sky Network Television and Infomedia. The Motley Fool owns shares of Infomedia and Sky Network Television.

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