Should we be dumping income stocks?

Founder and Publisher of the Switzer Report
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Another rise on Wall Street on Friday, albeit a late, little one, keeps alive Charlie Aitken’s claim that the bear market is over. I’m not as confident as Charlie, but we both agree that the future for stock players is looking a lot rosier than this time last year.

Stocks on a roll

The Dow and S&P 500 have posted their fifth-straight winning week. On Friday the Dow was up 0.32% to 13,207.95 and is now up 8.11% for the year to date. The S&P 500 is up 11.97% for the year to date and the Nasdaq is up 15.96%!

In case you’re wondering, we’re now up 5.4% on the S&P/ASX 200 index for the year to date and it would be a lot higher if Chinese growth was stronger and our dollar was a lot weaker.

So, how do you play the current market with Charlie’s big call on the one hand, and the fact that the scariest months of all – September and October – loom with a US election in November and the so-called ‘fiscal cliff’ waiting in late December on the other hand?

If Charlie is right and no big sell-offs happen, the trend will be upward in general.

So, the big buying opportunity might not show up and we could increasingly see smaller cap stocks or cyclical stocks, not necessarily known for paying great dividends, starting to make most of the running on the market.


The investor who is happy to change his or her investment strategy might be switching from their interest in dividend-paying stocks – which I have been recommending for the past three years for safety – and focusing on those stocks with big potential capital gain, such as BHP Billiton (BHP) and Rio Tinto (RIO) or lesser names known for bigger volatility, say Fortescue (FMG) or Beach Energy (BPT).

But what does the retiree or close-to-retirement wealth-builder do? If they keep buying Commonwealth Bank (CBA) for dividends, the percentage return falls at higher share prices and effectively they would be dollar cost averaging up. CBA was at $43 last year, but it’s now closer to $56.

Well, if you had the steel to stick to your investment strategy to buy great dividend paying stocks over the past three years, you have made a lot of money out of dividends and capital gain and if you don’t believe me, think of Telstra (TLS) shareholders who went long over the past three years.

Rising tide

If you stick to your strategy, you will be in for a leaner time, but you will still get solid dividends in dollar terms. As the old saying goes “a rising tide lifts all boats.”

But dividend-payers won’t rise by as much. Why? Well, you as a long-term investor will hold, but short-term investors will be dumping your stocks to chase cyclicals. But while prices may not be surging, that could provide you with a buying opportunity again!

Also let me throw in that experts argue that when a bear market ends, you see massive spikes in stock markets and this will drag along yield stocks as well.

I know a bloke who retired with about $5 million of dividend paying stocks and no real estate. That’s how he amassed so much in stocks – he rented all of his life.

He now averages about 7% in dividends in retirement with no tax to pay and he and his wife live on about $350,000 a year. He doesn’t worry about his capital going up and down as he has great companies that will stand the test of time. He also has a good number of stocks in his portfolio so he is not terribly exposed.

By the way, during a bad time when his dividends could drop to 5%, he still would have $250,000 to live on! I guess when that happens he might spend 12 months in France instead of the usual six months because it’s cheaper to live and the Aussie dollar buys a lot.

Important information: 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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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