It seems yesterday's riveting edition of Motley Fool Take Stock struck quite a chord…
The penny is dropping. For income lovers, in this era of ultra-low interest rates, dividends really are the ONLY game in town.
— The stock market feels like it's as flat as a tack, meaning capital gains are at a premium.
— Term deposits at 3%, and falling fast, aren't going to do it for you.
— Bond yields are at record lows.
— Property prices are at record highs, meaning rental yields are in the can.
Thank goodness a marijuana IPO is set to light up the ASX on Thursday. The AFR reports Perth-based Phytotech is seeking to raise $5 million, listing at 20 cents a share.
Based on Phytotech's founder Ross Smith's claims his company is the medical cannabis "investment opportunity of the decade," this IPO looks like it could be smoking hot, getting off to a real high. All will be revealed tomorrow.
Penny stocks are not my thing. Nor are grandiose statements from directors like the above, plus Mr Smith's other comment that the medical cannabis investment space is "the hottest on the planet at the present."
Plus, could he have chosen any "racier" name than Phytotech to call the company? While this one may hit a new high soon after listing, I fully expect it to come down once the initial hit has worn off. Buyer beware.
Meanwhile, back on terra firma, and surprise, surprise, the ASX is on the up, presumably following European markets higher.
It's what happens when interest rates are virtually at zero, bond yields are trading at less than 1%, with the European Central Bank (ECB) widely expected to embark on a massive money printing exercise in an attempt to revive growth.
Source: The Sydney Morning Herald
Here in Australia, if Westpac's Bill Evans is right, we'll be undergoing our very own attempt to revive growth on February 3rd, when according to Fairfax, he's calling for the RBA to CUT interest rates.
Currently, the market is assigning a minimal chance of that actually happening, something Mr Evans acknowledges. Given that, if Glenn Stevens were to surprise the market and actually trim the cash rate, expect fireworks.
Markets react violently to surprises — witness the truly massive 40% spike in the Swiss franc last week when when the Swiss National Bank unexpectedly abandoned the currency's peg to the euro.
Let me be clear. I'm not expecting a mere 25 basis points off the RBA's cash rate to have anything like such a violent reaction. But let's also be very clear — if an interest rate cut did unexpectedly come to pass on February 3rd, the ASX would likely jump higher, possibly significantly so, and the Aussie dollar would likely slump below US80 cents.
Both events would be a net gain for me. My existing portfolio would jump, and my substantial US holdings, some of which come directly from the US-side of our Motley Fool Share Advisor buy recommendations, would benefit from the Aussie dollar's fall.
But I'm not content with just that.
As I've written previously, I'm getting in ahead of the game, adding to my position in my top small-cap growth stock (as featured in "Shares 2015" — available free to new members of Motley Fool Share Advisor and Motley Fool Dividend Investor), plus snapping up some more dividend paying stocks… including two more I'm buying today.
One stock I already hold is BHP Billiton (ASX: BHP). I thought I was getting a bargain when the shares fell below $30. They are now $28. I've never been good at buying right at the bottom of the market.
Only yesterday I was suggesting I'd own BHP for the dividend alone, effectively writing-off capital gains until such time as supply and demand in the oil and iron ore markets came back into equilibrium.
Fast forward a day — yes, one whole trading day — and I'm tempted to change my tune.
In the first instance, Morgan Stanley came out with an "overweight" rating on BHP Billiton and a $37 price target. Music to my ears, given I'm already overweight… the stock too.
Secondly, this morning BHP released its operational update for the half year ended December 2014. No surprises — production up, commodity prices down, costs down and a reduction in oil rigs in their US shale properties.
Still, the market liked what it saw… which brings me to my third point. As I write, BHP shares are up 1.78% on the day, outpacing the gains for the market. Who doesn't like a winner, particularly an overweight one? Giddy up.
It's about time too. Before dividends, even after today's 67 point gain, the S&P/ASX 200 Index is up less than 1% over the past 12 months.
Give me strength.
Better, give me a recession, low interest rates, and turn on the printing presses. That's exactly what's happening in Europe, and overnight, Germany's DAX 30 index hit a new record high, France's CAC 40 index rose over 1% and the UK's FTSE 100 index remains within a few percentage points of its all time high.
I jest, of course. Recessions come with high unemployment, low wage growth, social problems and increased government debt. Those European countries might have surging stock markets, but they are not without problems.
My point is, when interest rates fall, as looks increasingly to be the case here in Australia, stock markets rise.
By looking at dividends alone, the contest is simple…
In the red corner, we have term deposits earning 3%, and falling, before tax. He's a ultra-conservative fighter, relying on the jab alone. Rarely wins, and when he does, he wins on points.
In the blue corner, we have 5% fully franked dividends, and rising, which gross up to over 7% when franking credits are taken into account. A solid defense, but not afraid to pull the trigger on his trademark right hook when the time is right. Has been on the canvas a number of times, but always picks himself up and lasts the distance. Most wins have come by way of technical knock out.
When is the right time? The right time to eschew cash and embrace shares?
In the words of Motley Fool CEO and co-founder Tom Gardner, the right time is always now. According to Vanguard Australia, over the past 30 years, Australian shares have soundly out-performed cash. Over the next 5, 10, 20 and 30 years, although the numbers will change, I fully expect shares will continue to out-perform cash.
The trick to winning is simple. It's buying well and holding through inevitable bouts of volatility, for the long-term.
Sadly, most people fail at this most simple set of instructions. They buy speculative garbage. They sell out when markets inevitably fall. They hold for weeks, not years.
In short, they buy high and sell low. The result is a portfolio doomed to mediocrity at best, failure at worst.
Today, with Australia potentially on the brink of even lower interest rates, arguably the time to buy is right now.
The time for ME is right NOW. As soon as I finish writing this, I'm buying shares in two companies.
The first is one of Scott Phillips' recent best buys now stocks, exclusively available to Motley Fool Share Advisor (save 60% off) subscribers. Trading on a fully franked dividend yield of 4.5% (6.4% gross), the company is growing, and the stock is also dirt cheap.
The second is Andrew Page's most recent recommendation to subscribers of Motley Fool Dividend Investor. Coincidentally, it's also trading on a forecastfully franked dividend yield of 4.5% (6.4% gross). As Andrew says, this small "under the radar" company houses one of Australia's fastest growing brand names.
You gotta be in it to win it.
