Question 1: I hold shares in NAB, ANZ and Westpac. They will pay dividends in a couple of months. Is it wise to reinvest the dividends in these banks for shares at the present market price? What do you say about reinvesting in the same companies?
Answer: This is a really good question because there is no right or wrong answer to participation in DRPs (dividend re-investment plans). Many years ago, companies offered big discounts on shares purchased through a DRP (sometimes as high as 7.5%), and it was arguably a ‘no-brainer” to participate. Today, most of the discounts have gone – so it is not a straightforward decision.
I think a DRP makes sense if:
- You don’t need the cash – and you would end up with small balances that would otherwise just go into your bank account;
- The market is in a long-term uptrend; and
- In regard to the individual company, you think it looks sold for the long term.
Currently, I think banks are still somewhat “cheap” compared to the rest of the market. If I didn’t need the cash, I might go into the DRP but I would certainly keep my participation under ongoing close review.
Question 2: What is your view on WiseTech Global (WTC) and the short sellers?
Answer: I wrote about this in today’s Switzer Daily (http://switzer.com.au/short-selling-is-out-of-control-2/). I don’t think short seller J Capital has landed too many telling blows. However, where there is “smoke” there can be “fire”. My sense is that the market will be a little more circumspect about WiseTech going forward. Certainly, its acquisition strategy will get a lot more scrutiny. Interestingly, the short position in WTC is actually very small.
Question 3: I have lost around $30,000 in Retail Foods Group (RFG). Is it worth participating in their Share Purchase Plan (SPP) to bring my average buy down in the hope I can recoup some of my money?
Answer: On the one hand, the SPP is at 10c and the shares are currently trading at 14c. On the other hand, the company has been a dog, the funds raised are being used to repay debt, it has regulatory and class action risks hanging over it, it has strained relationships with some of its franchisees and I am not convinced that the management team can turn it around.
I guess I would sell some shares on market now and then buy them back in the SPP. I am not sure I would be keen to increase my exposure. RFG can only be described as “high risk”.
Question 4: Some time ago we gave our daughter some Argo (ARG) shares and connected dividend reinvestment. These have worked well and the value has increased with compound interest. She wishes to start another investment with similar safety as ARG. Could you please advise your thoughts on another fund?
Answer: Congratulations on firstly, the generosity of your gift, and secondly, for the way your daughter has responded. Hopefully, she will develop a lifelong interest in investment.
Any of the other major LICs (listed investment companies) such as Milton Corporation (MLT) or Australian Foundation (AFI) would be suitable. I would also throw Switzer Dividend Growth Fund (SWTZ) or eInvest (EIGA) into that mix. If she was feeling a little more adventurous, you could suggest some individual shares – perhaps CBA, BHP and CSL (for the long term).
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.