Today is the 1st of April, known to many as April Fool’s Day. A day where many practical jokes and hoaxes are played on unsuspecting victims – the fools.
However, we here at the Motley Fool believe in a different type of Fool (capital F). A Foolish investor. Someone who is “greedy when others are fearful” to quote Warren Buffett. Someone who questions conventional wisdom. Someone who is probably thinking that now is a great time to invest.
With the All Ordinaries (ASX: XAO) down around 30% from its February highs, there is certainly value to be found on the ASX. Whether you’re interested in dividend shares or growth opportunities, many great S&P/ASX 200 Index (ASX: XJO) companies are currently trading at a fraction of the price they were a couple months ago.
Sure they may drop lower, but a Fool’s job is to think long term. Try to ignore the short term volatility. Because fast-forward a few years and I believe this COVID-19 pandemic will be behind us, with strong ASX companies growing earnings and dividends once again.
Most companies have been heavily sold off over the past month, decreasing their market capitalisation and lowering their share prices. This means dividend yields will be higher, making them look more attractive to own. However, it’s important to make sure these shares are not dividend traps – that is, companies offering large dividend yields that are likely to be cut due to reduced earnings and profit. As an example, shares in the big banks like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) are candidates for dividend traps.
For dividend-seeking Fools, it’s important to look for companies that will be able to maintain a high level of cash flow, thus ensuring they can maintain their dividends. Some companies such as Rural Funds Group (ASX: RFF) have even managed to grow their dividends during this bear market. Another dividend share that looks enticing is Dicker Data Ltd (ASX: DDR). Dicker Data offers computer hardware and software products at a time when many of us are setting up home offices to work from.
Growth shares pay little or no dividend, instead using the cash to reinvest in the company for growth. They believe they can give you a better return for the cash by reinvesting it in the company than you can by investing it elsewhere. This usually leads to growth companies trading on much higher valuations/multiples. In many cases, it is these lofty valuations that have been hit the hardest from the recent bear market, with shares in some companies such as Afterpay Ltd (ASX: APT) still 50% lower than what they were mid February.
However, considerations should be made for how cyclical the growth company is, if it uses much debt to fund its growth and how the economic fallout might affect it going forward. If its business dries up and it has debt repayments to make, that’s a recipe for disaster.
One growth share I like, thanks to its software subscription revenue and strong balance sheet, is Altium Limited (ASX: ALU).
It may seem overwhelming to start out investing, especially today when the market is down. However taking baby steps and investing small amounts in well known companies can help ease the process.
If you aren’t sure where to start with individual shares, buying an ETF such as BetaShares Australia 200 ETF (ASX: A200) gives you exposure to the largest 200 companies on the ASX with a single trade, giving you diversification and peace of mind.
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Motley Fool contributor Michael Tonon owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, and National Australia Bank Limited. 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 Scott Phillips.