The joy of fully franked dividends

Writing in the AFR, John Wasiliev called the recent stock market correction a “wake-up call.”

In the same publication, Karen Maley called it a “… calamitous sell-off in global equity markets.”

It’s ugly…” said one pundit in The Wall Street Journal.

I called it a buying opportunity, one I wasn’t going to miss out on, quickly putting money to work, investing in a number of ASX dividend paying stocks.

And I’m not done yet, either, having committed to investing $15,000 of my family’s money into the first recommendation of our brand new investing service, Motley Fool Dividend Investor.

I won’t have to wait too much longer — our resident dividend expert Andrew Page will reveal the stock this coming Wednesday, October 29th 2014, after the market close.

In an update to the thousands of new subscribers of Motley Fool Dividend Investor (thank you!), Andrew said…


“I won’t give too much away here, other than to say it is presently offering a 4.6% fully franked yield, which is 6.6% grossed-up, and that it is one of the country’s oldest and most established businesses.”


In this low interest rate environment, what’s not to like about dividend paying stocks?

Or in any environment, mind you, given dividends have been shown to make up around half of the total returns of the stock market, over the long-term. And that’s NOT taking into account the tax benefits of fully franked dividends.

It’s just that now, with the RBA cash rate languishing at just 2.5%, the relative attractions of dividend paying stocks become more stark and even more obvious.

Like many Australians, I have cash sitting in high interest savings accounts, and term deposits, earning a pittance of a return — 3% per annum, if I’m lucky.

I’m not about to pile ALL my spare cash into dividend paying stocks today, but I am prepared to regularly buy such stocks in the weeks, months and years ahead… starting with Andrew Page’s first recommendation for Motley Fool Dividend Investor, when the Motley Fool’s strict ethical trading rules allow me.

As I write, the S&P/ASX 200 Index is on the up again, adding to its impressive bounce-back over the past couple of weeks.

Whereas not too long ago all eyes were on ASX 5,111 — the level at which the benchmark index would have fallen into official correction territory — they are now on ASX 5,500. At the rate we’re going, it might even happen this week.

Who’d do this stock market trading thing for a living?

One day you’re staring at oblivion, the next day you’re an investing legend.

Of course, during the recent wobbles, when I was eagerly adding money to the market, I wasn’t to know the market would bounce back quite as quickly as it’s done.

Heck, even boring old Contango MicroCap Limited (ASX: CTN), a stock I already own, has jumped 7% since I highlighted it in these very pages, less than two weeks ago.

Back then, the shares of this listed investment company (LIC) were trading on a forecast dividend yield of 6.67%. Today, with the rise in the share price, that yield has come down a little, but is still very attractive, especially given the stock’s transparent dividend policy.

What I did know, however, is that history has shown, time and time again, markets do recover — it’s just a matter of time…

Such knowledge, and experience, gives me the confidence to wade into choppy markets, buying when others are selling, keeping my cool while all around are in a state of panic.

Having a good cash buffer helps too — you never know when you might need it, and you never know when compelling stock-buying opportunities might present themselves.

Speaking of investing better, Warren Buffett says if you cannot control your emotions, you cannot control your money.

Research from my colleague Morgan Housel has shown market corrections come along, on average, every 11 months. Prepare now, Foolish readers… we’re overdue one, the recent wobble falling just short of the official definition of a market correction, that being a 10% fall.

My betting is we’re done with corrections for a little while longer.

With interest rates so low, and staying low, and the US economy recovering, as witnessed by 80% of S&P 500 companies who’ve reported earnings so far having beaten earnings expectations, when the next wobble does inevitably come, bargain hunters will emerge again, just like they have these past two weeks.

Here’s how I’m acting, and preparing…

1) Not withstanding the $15,000 I’m soon to invest in Andrew Page’s first Motley Fool Dividend Investor stock recommendation, I’m keeping a healthy cash balance for the inevitable buying opportunities.

2) Selling my least favourite stocks during times of market stability, not waiting to do so during times of market volatility. I sold my biggest dog, Lynas Corp (ASX: LYC), a couple of months ago when markets were calm and the Lynas’ share price was double that of today. Phew.

3) Regularly putting money to work, whatever the market is doing, mostly targeting stocks paying fully franked dividends. In this low interest rate environment, the yields are compelling, and the tax benefits of fully franked dividends simply too good to refuse.

4) Continue to invest for the long-term. At a minimum, have a three to five year investing horizon. At a maximum, invest for a lifetime, well into retirement, and beyond, courtesy of the lucky, but hopefully educated, people who will inherit your estate.

And here’s what I WON’T be doing if and when the market does correct…

1) Looking at the value of my overall portfolio, and comparing it to its pre-correction high point. If you have to look, compare it to where it stood at the beginning of 2010.

2) Selling in the hope of buying back in later, when the dust has settled. As witnessed by the events of the last couple of weeks, such behaviour is the equivalent of investor suicide.

In summary, keep it simple, and don’t do stupid things.

As is so often the case, I’ll leave the last word to Warren Buffett

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Don’t you be Warren Buffett’s “other people.”

I think my I.Q. is above 25. I know it’s less than 120. There’s a whole heap of room between those two numbers for ordinary investors like you and I to make small fortunes out of stock market investing.

As ever, I wish you happy, and profitable investing.

P.S. Just this last week, I committed to investing $100,000 of my family’s money behind Motley Fool Dividend Investor stock recommendations. That’s what I call skin in the game. There are just hours left to lock in your “early bird” offer of just $98 for the first year of Motley Fool Dividend Investor. Click here to act now.

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