Here’s why the death of ASX yield stocks has been greatly exaggerated

Was it only just yesterday when I said fear was evaporating?

Come in spinner…

Overnight, US stocks fell the most in a month after disappointing earnings from Alcoa.

Bonds fell on fresh concerns over inflation. The pound sank. Oil gave back some of yesterday’s gains. Emerging markets fell. Gold dropped, again.

Might as well give the game away, huh?

Naturally, the ASX hit reverse today, falling 40 points at the open. But that was nothing compared to the fall in former high-flyer Vocus Communications  (ASX: VOC), the stock formerly known as one of the bigger holdings in my SMSF.

Vocus shares have been on the nose ever since TPG Telecom (ASX: TPM) warned of a sharp slowdown in the pace of its organic earnings growth.

But today it’s boardroom upheaval doing the damage, with Vocus founder James Spenceley and former Amcom Telecommunications boss Tony Grist resigning from the Vocus board after a failed leadership coup.

Clearly something is amiss at Vocus, something that is also clearly reflected in the Vocus share price, down a whopping 42% since the stock peaked in June this year, now trading at $5.45.

Hell hath no fury like a highly valued growth stock gone wrong.

I wonder what the boffins at Citi think of Vocus shares now? As reported in theAFR, they stuck their head above the parapet by slapping a buy recommendation on the stock with a target price of $7.45 right before the boardroom shenanigans hit the wires.

A target price of $7.45 would imply upside potential of 37%. Sounds attractive, right?

Catching falling knives is a very hazardous occupation, something I’m happy to leave to others. I much prefer to invest in companies with some solid tailwinds and strong operating momentum. Right now, Vocus has neither.

Still, I’m hanging on to my Vocus shares, for better or worse. I’ll know in a couple of years whether I was right. Wish me luck.

Speaking of luck, investors preparing to pile into Australia’s maiden 30-year bond will need plenty of it too. The government’s longest ever loan will pay the princely rate of 3.25% all the way until March 2047.

That’s a hell of a long time to accept such a mediocre rate of return. Especially at a time when bond prices are falling on concerns over inflation. I’ve got a feeling this one may end badly.

Still, bond funds have little choice but to buy such offerings, especially as this is one of the higher yielding government bonds in the world. Germany’s 30-year rate stands at just 0.67% and Japan’s at just 0.5%.

By comparison, when it comes to interest rates, we truly are the lucky country.

Unlike bond funds, retail investors do have a choice.

And for income-hungry investors, to my mind, it’s hard to go past ASX dividend-paying stocks.

I’m not the only one either, with Marcus Tuck of Mason Stevens saying on Livewire

The market’s quest for income-producing assets is likely to be an ongoing theme for quite some time. The best protection against market volatility is to focus on high quality companies that can produce reliable EPS growth.

Tuck ran a screen on the ASX 100 universe for stocks combining growth and yield, coming up with names like Wesfarmers (ASX: WES), JB Hi-Fi (ASX: JBH), Suncorp (ASX: SUN) and Coca-Cola Amatil (ASX: CCL), amongst others.

It’s a decent list, for sure. But as with everything except term deposits, not without risk.

And therein lies the rub. What do you do with your money in this low interest rate environment?

What you don’t do is worry about the day to day movements of the share market.

Down today. Up yesterday. Who knows where it’s headed tomorrow? Zoom out a little, look at the long-term growth of the stock market, and smell the roses.

By comparison to the stock market, dividend payments are incredibly stable.

By comparison to bond yields, dividend yields are very attractive. More so when you add in the very real benefit of franking credits.

I recently asked Andrew Page, our resident dividend expert, to compile a list of his 3 top dividend stocks.

But I added one proviso — each stock must be yielding at least 6%.

To say one of the names shocked me is a massive understatement. In fact, I asked Andrew to double-check his research, given the stock in question was, at the time, trading on a 13% trailing dividend yield.

Andrew was unshaken. He admitted the company could trim its dividend, but even if that happened, he thought the yield would still remain very attractive. And, with the stock trading on a trailing price to earnings ratio of less that 5 times, the downside looked relatively limited.

In the 3 weeks since Andrew first published his report, the stock is already up over 25%. Yet Andrew thinks there could be further gains ahead.

Andrew’s report — Three Dividend Stars Yielding More than 6% — is available the instant you subscribe to Andrew’s Motley Fool Dividend Investor advisory service.

Not only will you get the name of the “under the radar” stock that was trading on a dividend yield of 13%, you’ll also get the name of the ASX stock that today trades on a fully franked dividend yield of 7.7% (11% gross) and the blue chip stalwart that’s trading on a fully franked dividend yield of over 6% (over 8.5% gross).

In their desperate hunt for yield, many investors stick to the so-called safety of ASX 100 stocks.

Not so Andrew Page.

A key mandate for his Motley Fool Dividend Investor service is to not just recommended dividend-paying stocks, but to outperform the returns of the market. So far so good, with the average return of his recommended stocks more than tripling the return of the All Ordinaries, both with dividends included.

Sure, there’s a little more risk. But by going “under the radar” — to stocks that can trade on dividend yields of as much as 13% — there’s the very real possibility of out-sized capital gains.



Motley Fool General Manager Bruce Jackson has a position in Vocus and Wesfarmers. 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). Authorised by Bruce Jackson.

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