A quick and easy way to sniff out dividend discounts
Money Morning | 31 August, 2010
From Gary Booysen, Stockmarket Sleuth analyst
Dear Reader,
Share price falls aren't bad news for everyone.
If you're trying to get a decent income from your investments, these days the stock market is still one of the best places to look for it.
Savings rates on bank deposits are horrible and it looks like they're going to get even worse next month as South African Reserve Bank Governor, Gill Marcus cuts rates one more time.
But, following its latest 8.35% fall, to a three week low, the JSE All Share Index is now offering an average dividend yield of 2.41%. And while it's not spectacular, contained in that number are plenty of high-yielding South African shares that give you a lot more bang for your buck. All you need to know is how to find them.
MoneyWeek’s David Stevenson has some interesting ideas on what you’re looking for when it comes to high yield stocks but the real kicker for today’s issue is we’ve selected one addictive dividend play. Read on to find out more…
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Right now you can snap up top JSE listed shares trading at a 50% discount…
As a shrewd investor, every cent counts. This is especially true when the market is looking top heavy.
Well, right now, we’re offering you a chance to discover a strategy that allows you to buy shares at about half of what they’re really worth.
But, be warned this opportunity won’t last long... So don’t delay
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The case for buying unpopular stocks
To be successful with high dividend yielding stocks you must realise it’s all about fashion. Or rather, it's about the exact opposite. A high dividend yield could be saying that a stock has fallen right out of favour with investors.
After all, the dividend yield of a stock is simply: The dividend the share will pay out divided by its price. And that means, even if actual payouts stay the same and the price has fallen drastically, the yield will automatically be forced skywards. In other words, if there have been more sellers than buyers, and the sentiment in the market is rubbish, you can often pick up high dividend yielding shares at a discount.
It's actually a lot more common than you think. These days, investors get so wrapped up chasing capital gains they don't take into account the income they're receiving. But, when prices fall that's your opportunity to get into high yielding stocks cheap.
The type of high yield stocks you're looking for are probably also going to look pretty cheap in price to earnings (PE) terms, too.
This can happen for one or more reasons. Sometimes high-yielders are in sectors the market just doesn't like. Maybe there was a question mark over whether the dividend would be paid out in full. Or perhaps there's always been a stigma about the company concerned.
Here's where a great opportunity can arise for investors who are prepared to take a contrarian view.
By buying when a share is unloved and cheap, you can lock in a tasty yield straightaway. Then at some stage in the future, you may find you've made a chunky profit too. That's when the market becomes keen on the stock once again.
Of course, most of the time, the payout is the only tangible thing you get from holding a share. Yet many people have no idea how much dividends add to the overall amount of money they can make.
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Dividends are crucial for long-term returns
Author and GMO investment manager James Montier sums this up in his latest newsletter. "To those who charge around trying to guess the next quarter's make believe earnings number, the concept of dividends seems wholly irrelevant", he says. "But dividends are a vital element of return."
"Looking at the US market since 1871, on average over the very long-term, dividends have accounted for some 90% of the total return", he says. It's a similar story in Europe where "80% to 100% of the total returns achieved since 1970 have come from dividends (combining yield and real dividend growth)".
Phenomenal!
I'm actually going to print that again: Up to 100% of returns came from dividends! That is incredible! It means that, in some European markets, almost all the long-term money made has been down to dividend payments.
For me, that makes dividends a no brainer. High yield stocks that are steadily upping their payouts are a 'must have' part of any long-term portfolio.
And even better, when markets fall, high yield stocks tend to do better than the rest. That's because a decent payout level can help to protect a share price when times get tougher.
Take the South African construction industry for example. Right now, construction companies find themselves drifting listlessly in the doldrums. The South African governments infrastructure spend just doesn’t seem to be able to kick start the industry. There’s office space aplenty and the organic demand isn’t there.
And yet while the Construction and Materials Index continues to slide down its support level, companies like PPC and Raubex remain ahead of the game with their high dividend yields (5.64% and 6.81% respectively). In investment terms, they remain in far better shape than their ailing counterparts.
Source: Sharefriend
Yet, as Montier says - without pulling any punches - the market is still completely missing the point on the dividend front.
As he puts it, "dividends have fallen out of favour with CEO as well as 'investors' - although it pains me to use that term for the seeming ADHD-afflicted speculators who dominate the investment scene today".
Leon Campher, head of Association of Savings and Investments South Africa (Asisa) sounds the alarm bell saying investors shouldn’t be “taking a short-term view of market risk when the real risk is the long-term impact of inflation”.
So the current 'churn and burn' attitude is providing a contrarian buying opportunity. At some point many of today's high yielders will return to favour. When that happens, investors who are prepared to snap them up at today's depressed prices will be laughing all the way to the bank.
How to find the fantastic returns on dividend stocks
What are the best big-dividend paying stocks to buy right now? If you read my own personal newsletter, Stockmarket Sleuth, you'll have been privy to a steady stream of high dividend yielding tips over the last year.
But for today, I'll mention just one, with a way of finding more. Morgan Stanley's team have put together a list of stocks with "high and secure dividend yields". Among them are some of the world's biggest blue chips. But coming out on top of the pile is British American Tobacco (JSE: BTI).
Sure, it makes cigarettes, and that's not to everyone's taste. But, from an investment viewpoint, BATS looks like a good bet. Despite churning out ever-growing amounts of cash, the stock is standing on a current year PE of just 14.31 and a dividend yield of 4.93%. Further, Morgan Stanley is forecasting almost 9% dividend growth in 2011.
If you're looking for more top dividend players and a way to grow your long-term wealth check out my newsletter: Stockmarket Sleuth. We take a three to five year view and, over that period, aim to double your money at least, by providing you with top share selections.
If you'd like more information on becoming a member of Stockmarket Sleuth simply read the attached special report.
Until next week...
Gary Booysen
Analyst, Stockmarket Sleuth
Ps. For more related articles on dividends - "Dividends may be dull but they pay" and other shares to consider, visit www.moneyweekonline.co.za
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