Here’s why I’ve sworn off mining stocks, for life

Credit: Alrosa

The ASX is in a holding pattern, waiting for the US Federal Reserve’s latest decision on interest rates.

Overwhelmingly, the expectation is for Janet Yellen to keep US interest rates on hold. All will be revealed in the early hours of tomorrow morning, local time.

I’m with the majority, expecting the Fed will hold steady.

A few weeks back the Fed got a taste of how the markets might react to an unexpected hike in interest rates… they’ll throw one almighty temper tantrum.

Make no mistake. The markets are in control here, not the Fed.

Collectively, the markets dictate when interest rates can rise. Right now, that’s December. And after that, they can go higher again in 2017, ending the year around 1% or 1.25%.

Are we all clear now, Ms Yellen?

Read some of the fringe press, and you’ll think US interest rates are about to go through the roof, and that you should buy gold, because everything else you own is doomed.


Today, the market is on tenterhooks awaiting the Fed’s decision. Traders are at the ready. Sell bonds. Buy gold. Sell equities. Buy US dollars.


You can be almost guaranteed there will be something else to worry about.

A slowdown in China. A slumping oil price. The coming iron ore glut. A potential Trump presidency. Choose your own doomsday scenario.

So what do you do?

You wait. You wait until the coast is clear, and it’s “safe” to buy shares again.

And pigs might fly.

Shares are risky. All of the time.

Some are riskier than others. But all have some element of risk. As the fine print says, you can lose all of your money on an individual stock… especially on speculative mining stocks!

In return for taking on that risk, you expect to have the opportunity to make an out-sized return.

If you don’t want to take on that risk, you leave your money in the bank, earning 2% per annum, if you’re lucky.

That’s stock market investing in a nutshell.

Yet, for all the risk, there is one sure-fire way to put the odds of stock market investing success in your favour.

Time in the market.

The longer your investing time horizon, the greater your chance of making money. Buying great companies, holding them for the long-term, reinvesting the dividends along the way.

Yet, in this news-crazed short-term focused environment…

Where we sweat on every word coming from the mouth of new RBA governor Philip Lowe or indeed Janet Yellen…

And we watch the day to day movement of stock prices like hawks…

It’s easy to forget about the wonder of compounding returns.

Just ask the thousands of ordinary investors who bought Commonwealth Bank of Australia (ASX: CBA) shares when they floated in 1991, who reinvested their dividends, and who held all the way through till today, about the merits of long-term investing. Chances are you’ll be talking to a millionaire.

The pain of losing money far outweighs the joy of making money. As such, our brains are wired to NOT lose money.

We’re risk averse. We’ll sit in cash — despite it earning a pittance, and losing to inflation — rather than plonk it into solid, dividend paying shares, for example.

We’ll only invest in blue chips, without even realising that a large cap stock like Woolworths Limited (ASX: WOW) has fallen 40% from its 2014 peak, and BHP Billiton (ASX: BHP) has collapsed 45% from its 2014 peak.

So much for the safety of blue chips.

Speaking of BHP Billiton, yesterday I received my regular dividend payment, deposited straight into my bank account.

Normally, dividend payments are a cause for celebration. Money for nothing, magically appearing in your bank account, like clockwork. Franking credits back from the taxman are the icing on the cake.

Not this time. BHP have slashed their dividend by almost 80%. So much for their progressive dividend policy.

More fool me. I should have known better than to buy shares in a highly cyclical, capital intensive mining stock — BHP Billiton — for its dividend alone.

On the contrary, the time to buy such companies is when their valuation is through the roof and their dividend yield is through the floor… like when BHP shares were trading at just $14 in January this year.

Naturally, I missed that opportunity, although I have NO regrets. Once bitten, twice shy. I’ve now sworn off buying mining stocks for good. They are nothing but money pits.

That said, although I’m not a buyer, I’m still a holder of BHP shares, for better or worse.

And I’m still holding out for a $25 share price before I sell out. Only 20% to go…

I readily admit $25 is a totally arbitrary share price. And I readily admit BHP shares could just as easily hit $15 as $25 in the months and years ahead.

Such is an investor’s life. You win some, and you lose some. As long as you win big and lose small, you’ll be fine, over time.

Speaking of losses, for income-minded investors, the slashing of BHP’s dividend is a big blow.

Not so for owners of Australia’s largest multi-brand franchise company, Retail Food Group (ASX: RFG).

The owner of brands including Gloria Jeans, Donut King, Brumby’s Bakery and Crust Pizza recently reported excellent results, lifting its full year fully franked dividend by 18%.

So far in 2016, RFG’s shares have jumped over 50% higher.

Move aside Woolworths, BHP and a host of other so-called blue chips…

As is often the case, Andrew Page, our resident dividend expert, was ahead of the game.

He recommended subscribers to his Motley Fool Dividend Investor advisory service buy RFG shares back in December 2015, at a time when they were trading on a fully franked dividend yield of 5.2%.

You don’t need me to tell you how attractive a fully franked dividend yield (which grosses up to 7.4%) is when compared to term deposits. At the time, RFG was about a no-brainer of an investment as you can imagine.

But not only that, Andrew Page went ahead and reiterated his buy advice on RFG in February, March, April, May and June in his monthly “Best Buys Now” report.

That’s what I call a high conviction pick.

Since Andrew’s December 2015 recommendation, RFG shares are up over 60% for the Motley Fool Dividend Investor scorecard.

And Andrew is still a fan, recently naming RFG as one of his favourite dividend stocks in our free Motley Fool Money weekly podcast.

But right now, Andrew has just named three dividend stocks he thinks are even better bets than Retail Food Group.

1) One is a retail juggernaut, a unique play on the sheer scale of the Chinese middle class. Andrew thinks the current share price represents a great opportunity, the very tidy 3.4% fully franked dividend yield being the icing on the cake.

2) Another is a classic blue chip stalwart, a company trading on a fully franked dividend yield of over 6%. Add in the possibility of capital appreciation, and no wonder Andrew says this stock offers investors the opportunity to generate a very satisfactory — and relatively low risk — total return.

3) Finally, Andrew has reiterated his recent “double down” buy recommendation, a fast growing “under the radar” stock that trades on a gross dividend yield of around 5%. The stock is already on the move, having jumped almost 7% higher in the last few days, but Andrew thinks its best days are still ahead.

All three “Best Buys Now” stocks are named front and centre on the members-only Motley Fool Dividend Investor website. Click here now to check out my low price for a one year subscription to Australia’s most popular newsletter service.

Of course, you could choose to wait.

To wait for the overnight Fed decision on US interest rates.

Or to wait for this current bout of stock market volatility to pass.

Each to their own.

But believe me on this…

Whatever happens overnight, whatever happens when the RBA next meets…

For at least the new few years, if not the next decade or so, interest rates will remain at or around these “emergency low” levels.

As such, by comparison, dividend yields on ASX stocks — especially those of the fully franked variety — will remain attractive. Very attractive…

The next step, dear reader, is down to you.


Of the companies mentioned above, Bruce Jackson has an interest in BHP Billiton and Retail Food Group. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). 

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