The Motley Fool

All aboard the fully franked dividend gravy train

Overnight, the S&P 500 broke through the “landmark” 2,000 level for the first time ever.

Cue wild celebrations from the media, and investors alike. Who doesn’t like a new world record? And a rising portfolio?

Count me in, Foolish readers.

There’s nothing like backing a winner. As you’ll read below, myself and the team at Motley Fool Share Advisor have been backing our share of winners, including one of our very favourite recommended stocks now being up 80% for subscribers.

Happy days…

And there could be happier days, and years ahead, especially if Steven Einhorn of hedge fund Omega is right. Quoted on Reuters, he said…

“I continue to think this bull market has several years to go.”

Pop the champagne corks.

There could be several years of bull ahead!

Yesterday, the ASX/S&P 200 Index paused for breath, snapping a seven day winning streak. Today, it’s back on the up, trading above 5,600, with 5,700 and above firmly in its sights.

Impressively, that’s despite a plunging iron ore price, the price of the red dirt falling back to US$90 per tonne, its lowest point for two months.

Quite amazingly, the bulk metal has slumped more than 32% this year, dragging the share prices of companies like Fortescue Metals Group (ASX: FMG), Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI) down 25%, 48% and 43% respectively.

Yet, so far in 2014, the ASX/S&P 200 Index is up 5.4% — not to be sneezed at in this low interest rate environment. Dividends are on top.

That the iron ore price is on the nose should come as no surprise to regular readers of this free Motley Fool Take Stock email. It’s what happens when increased supply collides with reducing demand.

Who’d be an iron ore miner? It’s a game of chicken in a race to the bottom. The lowest cost producer wins. There’s very good reason why shares in Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) are down only 5% and 2% respectively in 2014, despite the plunging iron ore price.

For stock market investors, who’d buy shares in the smaller iron ore companies? Right now, it looks like a one-way ticket to the poor farm.

That I’m a very ordinary golfer is an understatement, but even I prefer three foot putts than 30 foot monsters. Sure, you might get lucky and buy a company like Mount Gibson Iron Limited (ASX: MGX) right at the bottom of the iron ore cycle… or the price of iron ore keeps falling, the company starts making losses, and it’s a case of look out below.

Never forget. A stock can always lose up to 100% of its value, and of your money. It’s true whether the share price is $10 or 10 cents, or whether the stock has previously risen 1000% or lost 90%. Your maximum loss is always 100%.

Reporting season is in full swing. Share prices are whipsawed, depending on their results, their outlook, and most importantly, their dividend.

Miss expectations, and your share price is pummeled, as was the case with BlueScope Steel Limited (ASX: BSL) yesterday — its shares plunged 12% after the market was underwhelmed with results, and once again, the company failed to declare a dividend.

Why anyone would own shares in this capital intensive, cyclical company that doesn’t pay a dividend is beyond me.

Each to their own, I guess. If 30 foot monster putts are your thing, by all means go for it. Just go in with your eyes wide open.

A couple of months back, regular readers may remember I highlighted RCG Group (ASX: RCG) as a stock on my radar.

At the time, the shares were trading at 57 cents, their forecast fully franked dividend yield being 7.8%, over 11% when grossed up for franking credits.

Today, the owner of the Athlete’s Foot chain reported results at the top end of expectations, also announcing a 12.5% increase in its fully franked full year dividend. Not surprisingly, the shares have jumped another 4.6% higher, now trading at 68 cents.

It all adds up to a near 20% gain since I highlighted RCG Group in these pages, the fully franked dividend being the icing on the cake.

A couple of months ago, RCG Group was a three-foot putt if ever there was one. It’s still a decent bet today, although like many retailers, the company did note market conditions remain “volatile and unpredictable.”

Ah… the joys of the retail sector. I’m generally not a fan, much preferring predictability over volatility.

Speaking of which, I was particularly impressed with results from two of our more predictable Motley Fool Share Advisor recommended stocks.

One — M2 Group Ltd (ASX: MTU)  — saw profits jump over 50% on revenue above $1 billion, the company also increasing its dividend by a whopping 45%.

This once small company has grown into something truly amazing. The company’s Dodo and Eftel acquisitions certainly helped boost the numbers, but it was particularly encouraging to note a solid improvement in organic growth, which increased by 8%. It bodes well for the future.

In the year ahead, M2 Group forecasts profits will grow by another 15 – 20%. Nothing’s certain, but I’ll happily take that sort of predictability over volatility any day. The 3.8% fully franked dividend yield, and growing, is nothing to be sneezed at in this low interest rate environment. Sadly, I don’t own the shares. But put me down as very interested.

The other stock is one of our very favourites at Motley Fool Share Advisor.

The company recently made it on to our Best Buys Now list, and with some justification. Profits rose 20%. The fully franked dividend was hiked 14%. Management is forecasting profits to rise 15% in the year ahead.

Trading at 15 times earnings and on a fully franked dividend yield of 3.7%, it’s no wonder Motley Fool Share Advisor Analyst Andrew Page said…

“I don’t understand why I don’t own the stock.”

Don’t worry Andrew. I’ve got good news. It’s not too late to jump on board.

Thankfully, I’m already aboard, having topped up my holding in recent weeks. The stock makes up a decent part of my huge $412,288.82 bet.

Yesterday, we reiterated our buy recommendation. It’s best days are likely still ahead.

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Bruce Jackson has an interest in BHP Billiton

Related Articles...