It's hard to believe, but last week the S&P/ASX 200 Index posted its biggest weekly gain in two months.
All this in a week where…
- We experienced a bond market flash crash;
- The Dow fell as much as 3% in intraday trading;
- Stock market volatility returned with a vengeance, and;
- The ASX slumped perilously close to an official 10% correction.
If that's as bad as it gets, I say bring it on.
Not one to look a gift horse in the mouth, I waded into the market, snapping up a couple of stocks I've had my eyes on, including one from the most recent edition of Motley Fool Share Advisor's 3 Best Buys Now stocks.
It's all part of "correction proofing" my portfolio…
- Having a long-term perspective.
- Having the ability, mentally and physically, to ride out these inevitable periods of volatility, safe in the knowledge that markets will recover.
- Having a handy cash buffer so I can take advantage of the cheaper prices on offer.
- Having a portfolio chock full of high quality stocks, many of them paying strong, and rising, fully franked dividends.
More on dividends below, including my chat with the Motley Fool's resident dividend expert, Andrew Page.
But first, to today's markets…
The S&P/ASX 200 Index is on the up again today, threatening to turn what was looking like a bear market back into a raging bull market.
What's next? ASX 5,800 by December 31st?
It seems unlikely now, but so was last week's rally, coming in the face of what Karen Maley said in the AFR was a "… calamitous sell-off in global equity markets."
Some calamity, huh?
"Bargain hunters drive sharemarket rebound," screamed the headline in today's The Australian Financial Review.
The same publication quoted JBWere executive director Mike Kendall as saying the correction was not unexpected and now investors were returning to the market looking for value, saying…
"Particularly when you see yields well back into the 6% mark plus franking, for a lot of investors that's pretty attractive when deposit rates are so low."
He could have taken the words right out of my mouth.
So long as interest rates do stay low, it's a winning formula...
Income generating stocks PLUS the tax effectiveness of fully franked dividends PLUS a rising dividend PLUS the very real prospect of share price growth EQUALS a winning portfolio.
Of course, it's easier said than done.
Qantas Airways Limited (ASX: QAN) was once a dividend paying stock. Myer Holdings Ltd (ASX: MYR) recently cut its dividend, the double whammy being its shares are riding near a 52-week low.
The moral of the story is clear… not all dividend paying stocks are created equal.
Regular Motley Fool Take Stock readers (the Motley Fool's free daily email) will know I've long held the view that interest rates will be staying low for the foreseeable future.
Those people who remain overweight in term deposits should take note, and take action.
And that includes my family.
Last week you may remember I shared the sad news that the interest rate on my high interest savings account had again been cut…
It's time for me to fight back against low interest rates, starting now.
Over the weekend, I made the decision to invest at least an additional $100,000 of my family's money into fully franked, dividend paying stocks.
And the timing could be perfect… given the market's wobbles has left some top quality, but overlooked dividend paying stocks still trading on the cheap.
You see, the strong bounce-back in the ASX has been driven largely by the big banks. Commonwealth Bank of Australia (ASX: CBA), for example, has jumped 5% higher in the last week — an impressive move for a company with a $123 billion market capitalisation.
The "usual yield suspects" might have taken off, but many mid-tier dividend paying stocks remain somewhat marooned… and that's precisely where my interest lies.
I'm not alone either… my colleague, friend and The Motley Fool's resident Dividend Expert Andrew Page is also seeing opportunity.
Andrew's targeting stocks:
- Paying safe, and growing, fully franked dividends.
- With starting dividend yields ideally above 4%, and very possibly higher.
- With lower risk.
- With strong share price appreciation potential.
One such candidate could be JB Hi-Fi Limited (ASX: JBH). Its shares are down a whopping 30% over the last 6 months, so much so that their dividend yield is now approaching 6%, fully franked.
The strong yield is all well and good, something any old stock picking monkey could tell you, but the real skill is in determining whether this is the bottom for JB Hi-Fi shares.
And that's where Andrew Page comes in. He hates losing money… which means you can be assured Andrew has done his homework on a stock well before it sees the light of day. I recently sat down with Andrew to talk all things dividends, including topics like…
- How dividends account for around half of the stock market's total returns, over time.
- How dividends are far less volatile than share prices.
- The current low interest rate environment, and by comparison to term deposits, how dividend paying stocks are very attractive.
- The tremendous tax benefits of fully franked dividends.
- Where Andrew Page is looking for the great dividend stocks of tomorrow.
- And much more…
Simply click here to watch the video.
Why dividend stocks?
1) The dividend imputation system, or franking credits, offers Australians a significant tax break.
2) They pay regular income, in the form of dividends.
3) Chosen carefully, the right dividend paying stocks have the potential for significant capital appreciation.
The message is clear…
If it's tax effective income you crave, by buying dividend paying stocks, in this low interest rate environment, you can and should beat most other forms of investment returns, over time.
Some investors dismiss dividend paying stocks as boring. Yet, chosen carefully, held for the long-term, with dividends reinvested, such so-called boring stocks can and do turn into "Millionaire Maker" investments.
Just check out the warm glow emanating from long-term holders of "Millionaire Maker" stocks like Commonwealth Bank and Woolworths Limited (ASX: WOW).
A million dollars… now that's the sort of "boring" I can get used to.
