The Motley Fool

The utterly delusional world of negative gearing — what could possibly go wrong?

Faith is restored.

Faith in the share market.

Faith in my stock picking ability.

Faith in dividends.

My BHP Billiton Limited (ASX: BHP) shares are trading back above $28. Last week’s rout is now a distant memory.

Happy Monday, Foolish readers… although not so happy for savers, including term deposit holders. On the contrary, your search for low-risk income just got a whole lot harder.

Fairfax media is reporting banks are cutting interest rates (again) on popular online savings accounts.

New regulations mean banks are going to compete less fiercely for deposits, with hard-working savers being the biggest losers… and that’s without the Reserve Bank of Australia (RBA) cutting interest rates any further, a move that’s still very much on the cards.

In case you missed it, last week ANZ Research said they expect the base rate to be slashed to just 2% as soon as May this year. If anything like that comes to pass, savers can soon kiss good-bye to earning interest rates above 3%. Shocking but true.

No wonder then the Weekend AFR featured an article with the headline…

 “Why dividend stocks will keep on giving

The article said dividends are likely to remain in vogue in 2015, quoting popular investors Charlie Aitken and Crispin Murray as being on board the dividend-stock gravy train.

They are speaking to the converted here – give me a growing company, paying a 6.1% fully franked dividend, any day over an online saving account earning 3% per annum, before tax.

Not only do I earn a decent income, I get the chance at capital growth, and courtesy of fully franked dividends, get to beat the taxman too.

And I know just how much Aussies love to beat the taxman – engineering your financial affairs so that you get a tax refund is a national sport here in Australia.

A refund from the taxman feels like free money. It’s so alluring that property investors deliberately make a loss so that they can get some of that “free money” back from the taxman.

Welcome to the delusional world of negative gearing.

Let me qualify that statement. I say delusional to people buying property today, not those who’ve prospered, disproportionately so I may add, from investing in property over the last 24 recession-free years.

The “delusionals” of today will happily negatively gear into property for the tax breaks alone, banking on capital growth for the whole stressful venture to be profitable.

Take Maureen Pound. As per a recent article in The Age, she is losing money on three rental properties she owns in Melbourne and Brisbane, but that doesn’t concern her. As the article says (with my emphasis)…

 “She’s putting her faith in future profits from rising property values.”

What could possibly go wrong?

Without getting into how property prices are already at sky high valuations, how first home buyers have deserted the market because house prices are so utterly unaffordable for them, and how average Australian household debt levels are at a record high of over 150% of annual disposable income… in my long investing career, I’ve never yet relied on “faith” as am investing strategy.

It prompted me to take a look back at the investment strategy for my Self Managed Super Fund (SMSF).

True to form, the word “faith” was not mentioned. Not once. Nor was property investing. It’s individual equities, and the dividend income they generate, with a little bit of options magic, for additional income, sprinkled on top, for my SMSF.

First written in 2008, although it’s reviewed regularly, not once has the investment strategy for my SMSF been changed. And nor should it either, given the fund’s goal is to provide a comfortable retirement to the Trustees, its timescale being 17 to 30 years.

Flipping into property, out of shares, into forex trading, and out of cash — or some other derivation — is a one-way ticket to the poor house. It only serves to enrich your broker, CFD providers, bankers and property spruikers, at your expense.

All that said, there has been one major change since my SMSF’s investment strategy was first written. Back then, in 2008, hard now as it may be to believe, the RBA cash rate was 7.25%.

7.25%! Term deposit holders could earn a decent income off that.

Not so today. With the cash rate today at 2.5%, and possibly going as low as 2%, safe as they are, term deposits are just not going to cut it for income-seeking investors, including retirees.

It’s why thousands of investors are turning to dividend-paying stocks, preferably of the fully franked variety.

It’s why the likes of Charlie Aitken continues to bang the drum on Telstra Corporation Ltd (ASX: TLS) and its 4.8% fully franked dividend yield, or 6.9% when grossed up for franking credits.

I’ve already got my fair fill of Telstra shares, so I’m looking elsewhere for my dividend thrills – like the ASX stock Andrew Page just tapped for members of Motley Fool Dividend Investor, the subscription-only stock-picking service focused purely on dividend stocks.

Trading on a fully franked grossed up dividend yield of 6.1%, this small “under the radar” company houses one of Australia’s fastest growing brand names.

It’s growing so fast that Commsec estimates put the company’s forward dividend growth rate for 2016 and 2017 at 16% and 18% respectively. It doesn’t take too big a leap of faith to see the potential today, and well into the future. I’m a buyer.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Of the companies mentioned above, Bruce Jackson has an interest in BHP Billiton and Telstra.

Related Articles...