By Peter Switzer, Switzer Super Report
Call me old fashioned but I love the 7% plus play and I always think of this when, like now, a lot of experts are talking about "rotation". That's market-speak for dumping, say, dividend-paying stocks that won't see a lot of capital gain and replacing them with, say, smaller cap/cyclical type companies.
They wouldn't have to be smallish but the "theme" ? more market-speak lingo ? is that it's time for stocks that will leverage off the improving global economy, low interest rates and, in our case, a lower Aussie dollar.
In our investment committee meetings for our financial planning business, I've been talking about positioning our clients for the uptick in these kinds of stocks. In fact, I've been looking at the expert fund managers, who spend all their waking moments analysing companies.
What the experts say
It's why I might actually think about a company such as Ainsworth Game Technology ((AGI)), when Roger Montgomery mentioned it on my TV show and wrote about it for us last week http://www.switzersuperreport.com.au/2013/game-theory-ainsworth-set-for-big-things/. And when Geoff Wilson said he liked Hills Holdings ((HIL)), I actually took them seriously.
The same goes with Charlie Aitken now telling me that David Jones ((DJS)) looks like a good, non-deep conviction, more risky play. On a quick, back-of-the-envelope calculation, DJs has a dividend yield of 5.7%, while Hills Industries comes in at 3.5% and Ainsworth Game Technology is delivering a 1.9% return before capital gain.
If I were young, a risk-taker or a fund manager who buys and sells frequently, pocketing profit and minimising losses, I'd punt on Ainsworth, but I'd have preferred it if Roger had tipped it to me last November when it was under $2, rather than its current $4.11 price!
But I'm not a punter with my SMSF portfolio, and as 50% of all stock market returns historically come from dividends, David Jones looks like the best buy out of this trio. With grossing up of the dividend, this 5.8% goes over 7% and it will take a couple of years, at least, until term deposits will be high enough for me to suggest to you that you might want to swap some stocks for safety.
The dividend play
On the subject of safety, let's look at Westpac ((WBC)). This stock is still yielding over 5% and after grossing up, it would be heading towards 7%. If the stock market goes up to 6,000 by the end of 2014 (as Charlie Aitken and others think is likely), then I bet Westpac at least gets to $35 from it's $32 price today. So the return ends up being 7% for one year on dividends, and about 3.5% for another half-year of dividends and around 10% capital gain.
So for about 15 months, you make around 20% and you do it on a safe conveyance.
Now let's imagine the share price only goes up 5%, you still are making around 15% over 15 months ? it's such an easy bet to make.
But best of all, when the next crash comes and the Westpac share price falls to say $20, then the dividend yield would be closer to 7% than 5%, but even if it was 5%, that would be OK considering it would be a crash.
Let's go back to the GFC and see what happened to Westpac's dividend. In 2007, it was $1.31; 2008 it was $1.42; 2009 it slipped to $1.16; but by 2010 it shot up to $1.39 and then in 2011 it was a healthy $1.56!
The dividend averaged $1.37 over these five years, and over that time, the share price was around $25 and so the average yield was 5.48% - let's call it 7% with grossing up.
There's still life in this yet
When people tell me the dividend play is over, I think of my 7% plus play and the best retirement plan I have ever seen. This was from a guy who was an employee in a good job with a fantastic investment strategy.
He always was anti-property, though he did leave work with a nice three-bedroom apartment. He always bought great dividend paying stocks and he retired with $5 million in his super ? dividend re-investment over 30 years can have surprisingly great returns.
Pre-GFC, his grossed up yield was around 10% ? 10% on $5 million. The GFC took his capital down to around $4 million, but his dividend yield was maybe closer to 9% for a year, and, in that year, he spent more time in France, as he always does, and he did it on a very high Aussie dollar!
Now that's a retirement plan, which tells me that dividend-paying stocks are never dead.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).