Our experts name two top dividend stocks you can buy now
By Bruce Jackson with Cat Baab-Muguira |Friday, October 5, 2012
Dear Fellow Share Market Investor,
![Bruce Jackson]() "Shares rise for 6th straight day", screams The Australian Financial Review, the longest rally in 10 months. It puts the S&P/ASX 200 index at 14-month highs.
Over in the US, the S&P 500 is on the cusp of a five year high. Although most Australians probably wouldn't realise it, the leading US index has jumped 16% so far in 2012.
Who said high unemployment and a slow economic recovery is bad for the share market?
Earlier this week, we boldly predicted the death of the term deposit. Based on the response to our message, with investors like you jumping on boardMotley Fool Share Advisor, our premium subscription-only best-of-the-beststock picking service, some of you at least are taking action now.
Congratulations, and thank you.
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You’ve seen the headlines: this week, interest rates sank to lows not seen since 2009. Worse, they’re likely to sink even further. The days of 5% interest rates are well and truly numbered, if not virtually already gone.
According to The Australian Financial Review, the futures market indicates that “the cash rate could drop to a record low of 2.25 to 2.5 per cent over the next 12 months.”
Worse, BT Investment Management's Vimal Gor said in same newspaper he's long Australian government bonds "on a prediction the cash rate will bottom out in 2014 at between 1% and 1.5%..."
Holy term deposit...
Fortunately, there’s a better spot for your money. In the face of crashing intertest rates, by comparison, solid, dividend-paying shares have arguablynever looked more appealing.
With that theme in mind, we asked Motley Fool Investment Analysts Scott Phillips and Mike King to each name one of their favourite dividend-paying stocks you can buy now.
Many of you may already know Scott from his popular columns in The Sydney Morning Herald and The Age, and his regular appearances on Sky Business and CNBC. In fact, just yesterday, he appeared on both channels, although not simultaneously, you might be pleased to know.
Pick #1: Boasting a 5.8% yield and with shares trading at a discount…
Investment analyst Scott Phillips’ pick is one that should be familiar to subscribers of our market-thumping Motley Fool Share Advisor member-only newsletter.
This company is a strong operator in a wonderful business -- one that is justly famous for being asset light, and for the operating leverage and fat profit margins inherent in the model. In fact, Scott’s pick is an absolute cash-flow monster!
Even better, the industry this company is in has fallen momentarily out of favour. That means we’ve got the chance to buy shares at a discount. So we can collect the dividend -- a sound 5.8% yield -- with the reasonable expectation of share-price appreciation.
Here’s the lowdown…
Platinum Asset Management (ASX: PTM) has managed mutual funds and hedge funds for nearly 20 years, but recently fund flows have been hit hard with the overall pullback in the share market. At the same time, some of Platinum’s funds have performed poorly.
For savvy investors, this spells opportunity. Scott is confident that Platinum is set to bounce back.
“Economic and investment cycles have always been with us,” he says, “and there’s nothing to suggest that ‘this time is different.’ The same is likely true of Platinum’s investment performance, making the company an attractive investment at this point in the cycle.”
Sound good? Read on for another promising dividend play...
Pick #2: Telecom company with fat yield
Motley Fool investment analyst Mike King has picked a Melbourne-based telecom company that’s trading at a cheap multiple relative to its sector.
As you may know, the telecom business is attractive based on its recurring-revenue model and runway of growth ahead. But you’d only want to own the best operators.
Mike’s pick is certainly a strong contender. This company has been expanding margins and growing earnings per share for ten years straight. What’s more, this company just raised its dividend by 28% in the last year!
Here’s the story…
M2 Telecommunications (ASX: MTU) supplies telecom, land-line and data services to small businesses and to residences. With a forward price-to-earnings ratio of 9.5 -- against a sector average of 12.6 -- M2 Telecommunications is well positioned for share price appreciation.
And while you’re waiting, collect the fat 5% yield -- as good as the rates we all once enjoyed on our term deposits.
Keep in mind, these two picks are really just the beginning.
Here at The Motley Fool, we’re constantly on the lookout for the very best investments for your hard-earned dollars...like the companies Scott Phillipspublicly named in January in The Sydney Morning Herald as his Top 4 Blue Chips For 2012.
As of earlier this week, including dividends, Scott’s “top stock portfolio” had returned 23.7% in 2012, well ahead of the All Ordinaries index dividend adjusted return of 11.3%.
Dividends to enrich a generation
The two companies highlighted above are worthy of consideration for any dividend-paying portfolio, as are the 8 ASX companies Motley Fool Share Advisor currently rates as a buy. It's no coincidence that all but one of those companies pays a dividend, the two highest yielding stocks currently trading on trailing yields of 7.7% and 6.6% respectively.
As a reminder, for a strictly limited time, we're offering 2-year subscriptions to Motley Fool Share Advisor at a massive discount to our regular price of $399 for a year's subscription. Sign up today and you can get two years of Motley Fool Share Advisor for only $299 -- a saving of over 60% -- and get instant access to all our current recommendations.
It might be seemingly easy for the Reserve Bank of Australia to kill term deposits, but it can't touch dividends. A mainstay of investing returns for well over a century, dividends are likely to continue to enrich this generation, and many more generations to come.
Until next time, as ever, we wish you happy, profitable investing.
Foolish Best,
![Scott Phillips]()
Bruce Jackson
General Manager
Motley Fool Australia
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Retirees can sleep easy owning shares
By Scott Phillips with Dan Caplinger
![Scott Phillips]() It's almost an unquestioned axiom of retirement planning: As you grow older, you should cut back on your risk. It sounds simple, but is it the right move?
That's the question Rob Arnott of Research Affiliates asked recently. After studying actual historical results over the past 140 years, Arnott came to what many would deem a highly unexpected answer: Owning shares later in life yields better overall results.
The basics of asset allocation
The idea behind what Arnott calls the "glidepath" approach to retirement is pretty simple. Early in life, you can afford to take a lot of risk with your investments, because you have plenty of time before you'll need to use the money. As a result, most financial advisors recommend high allocations to risky assets like shares for young investors.
Later, though, as you approach retirement, your time horizon shrinks. Typical asset allocation plans call for you to scale back on risk by replacing shares with fixed interest investments.
As intuitively appealing as the glidepath approach may be, Arnott found that it doesn't produce optimal results. Doing the exact opposite of the glidepath approach -- that is, investing conservatively early in life and then taking more risk as you get closer to retirement -- actually produced far better results in terms of higher account balances at retirement age and more favourable distributions.
Arnott's results may seem backward, but when you think about them for a while, they make more sense. Maximising returns early in life doesn't do much good because you have very little investment capital built up, so those returns apply only to a very small portfolio. Later in life is when you have the most assets at your disposal, and therefore you stand to gain the most by investing more aggressively to maximise returns.
A simpler message
Unfortunately, Arnott doesn't test another scenario: simply keeping a high allocation to shares throughout life. But a 2008 Hartford Investment Management study looked at the issue in a simpler way, comparing various asset allocations held for varying numbers of years.
The US study found that after just eight years, an 80% shares/20% bond portfolio beat out a 50% shares/40% bond/10% cash portfolio, even when you considered returns in the poorest 5% of the historical distribution.
In other words, even in nearly worst-case scenarios, the more aggressive portfolio outperformed the "safer" alternative -- and when things went well, the shares-heavy strategy did much better.
How to sleep at night
With those higher returns, though, often comes the nervousness of higher volatility. For those nearing retirement, an aggressive portfolio might maximise returns, but it may also come with plenty of sleepless nights.
That's why it's important to come up with your own strategy to smooth out your returns.
For some, hybrid securities can bring the prospect of better returns than fixed interest. For others, low-volatility, higher dividend shares can help boost returns.
The established nature of Telstra’s (ASX: TLS) business model, for example, while not entirely forgoing growth, gives a measure of security to risk-averse investors seeking better returns than are available from bonds or cash investments.
Don't give up on shares
Of course, it's far easier to depend on shares after a long bull market. The same high-equity approach got many target retirement funds in trouble back in 2008 and 2009, when their returns suffered. The key determinant still remains ensuring you don’t need your capital in the next 5 years before committing it to an investment in shares.
As important as it is to start investing early, your pre-retirement years will be the time when you have the most to gain or lose from your investment strategy. Take the time to tailor a strategy that matches up with your needs, and you'll be much happier with the overall outcome.
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