If you read enough of the mainstream financial press you’ve probably started to think that the dividend rally is over.
But we say that’s wrong.
In fact, our view is that many dividend-paying companies have barely started with paying out dividends.
And we’re not just saying that either, we’ve got proof.
We call it ‘Dividend Gaming’. We wrote to you about it a few months ago. Based on what we see in today’s market it’s as strong now as it was then…
Yesterday we explained that the US Federal Reserve had no intention of raising interest rates.
The Fed was just trying to manage market expectations by neither openly fuelling a stock bubble nor causing a crash.
The Fed’s goal is to see a steady rise in asset prices so everyone will feel happy! Just as some schools insist every kid gets a ribbon on Sports Day, the Fed wants everyone to win in stocks.
But while the Fed is being cagey, the Bank of England isn’t. It has let the market know exactly where it stands: rates will stay low for at least three more years…
Proof That Low Interest Rates Boost Stocks
Bloomberg News reports:
‘Carney, who became governor [of the Bank of England] on July 1, introduced forward guidance in August saying the BOE plans to hold its benchmark rate at 0.5 percent until unemployment falls to 7 percent from its current 7.8 percent. The bank doesn’t see that happening for another three years.‘
It’s as clear as day. Central banks want interest rates to stay low and they’ll do all they can to achieve it.
We don’t understand why so many people can’t see this. Look, we’re not saying it’s the right policy. And we’re not saying the central banks will achieve all their goals…because they won’t.
But it will do one thing: it will force investors to take bigger risks in order to boost their income.
The Bloomberg News article notes:
‘There is evidence that Britons are being driven to the stock market for returns. Investor sentiment on U.K. stocks is at its highest in six months, and equities are now the second-most-popular asset class after property…The U.K. benchmark FTSE 100 Index (UKX) has climbed more than 10 percent this year.‘
The evidence is there for all investors to see – stock prices have gone up. It’s that simple. And if interest rates stay low, odds are stock prices will keep going up.
That’s why the main US and UK indices are trading near record highs…while Australian stocks still need to climb 40% to take out the old high. But stay patient, because in our view it won’t be long before Aussie investors can celebrate a new record high too…
It May be Crazy, but it Works
Earlier we mentioned something we call ‘Dividend Gaming’. This is where companies use dividends as a way to attract investors.
They’ll use a number of tactics, all of them legal. The idea is to increase the dividend payout ratio as much as possible. One of the stocks we recommended three months ago in Australian Small-Cap Investigator has done just that.
It has increased its payout ratio from below 70% of profits to above 75% of profits.
It’s not the only company to do this. Other companies are taking ‘Dividend Gaming’ to another level. They’re paying out higher dividends to attract investors, and then getting some of the money back by issuing new shares.
Investors will go for that if they believe the company can use the money to grow the business and pay out higher dividends in the future.
Now, we know what you’re thinking. It doesn’t make sense if companies are paying out dividends and then raising capital. Investors are no better off. We get that. We understand it.
But tell that to the market. Because right now, crazy or not, the market loves companies that can pay higher dividends…and so do we.
Follow the Money into Dividend Stocks
Remember, we’re not saying we support low interest rate policies.
All we’re saying is that this is how things are right now. And if you want any chance of getting ahead and growing your wealth you’ve got no choice but to follow the money flow.
And right now money is flowing into dividend stocks…especially stocks that have shown a willingness to pay out higher dividends.
So, folks can carry on claiming that the dividend rally is over and recommend selling stocks. They can even say the market is too risky.
But we’ll put opinion to one side and stick with the evidence. The evidence tells us the dividend rally isn’t over. Foreign central banks have committed to keeping rates low and odds are the Reserve Bank of Australia will keep rates low too…and maybe cut them further.
If they do, everything is moving into place for investors to continue the surge into dividend stocks…and that means higher stock prices.
Nothing has happened to make us change our view that the Aussie market is heading towards 7,000 points in 2015. If you can handle the risk and you’re after a better-than-the-bank income stream, it’s still a great time to buy Aussie dividend stocks.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: GET OUT AND STAY OUT
