Knowledge is Power: Compound Interest, Retirement Tips, Tax Reform Questions Edition

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Australian Stocks: Dividend Contribution to Total Returns Since 1900

Australian stocks are known for their high dividend yields. Aussie firms tend to stable and growing dividends and investors also benefit from franking credits.

Dividend payments have been consistent over the long-term when compared to stock price appreciation according to an article by Dr Shane Oliver at AMP Capital.

From the article:

Chart #4 A bird in the hand is worth two in the bush

A high and sustainable starting point yield provides some security during volatile times. Since 1900, dividends (prior to allowing for franking credits) have provided just over half of the 11.8% average annual return from Australian shares and as can be seen in the next chart their contribution has been stable in contrast to the capital value of shares.

Source: Global Financial Data, Bloomberg, AMP Capital

Dividends are relatively smooth over time because most companies hate having to cut them as they know it annoys shareholders so they prefer to keep them sustainable.

Key message: a high and sustainable income yield for an investment provides some security during volatile times. It’s a bit like a down payment on future returns.

Source: Five great charts on investing for income (or cash flow), AMP Capital

 

On The Importance Of Dividend Growth To Long-Term Returns

Dividends play an important role in long-term equity returns. In fact, dividend growth is more important to long-term returns than dividend yield and P/E expansions. According to an post by Matthew A. Young at Young Investments, dividend growth accounts for a large portion of returns. From the article:

Dividend Growth is Key

MSCI published a report last year highlighting the importance of dividend growth to the return of global equity benchmarks. The chart below, taken from the report, shows that the longer the time horizon, the more important dividend growth becomes to overall return. Over short periods of time, returns are dominated by changes in valuation, but over the long run, dividend growth dominates. For the 20-year period ending in 2015, dividend growth contributed 65% to the total return of the MSCI All-Country World Index.

Average absolute return contribution from Dividend Yield, Dividend Growth, and Valuation Adjustments for different holding periods.

Source: Client Letter – July 2017, Young Investments

Five dividend growth stocks are listed below with their current yields for further research:

1.Company: General Mills Inc (GIS)
Current Dividend Yield: 3.42%
Sector: Food Products

2.Company: Royal Bank of Canada (RY)
Current Dividend Yield: 3.62%
Sector: Banking

3.Company: 3M Co (MMM)
Current Dividend Yield: 1.97%
Sector: Manufacturing Conglomerate

4.Company: Johnson & Johnson (JNJ)
Current Dividend Yield: 2.41%
Sector: Pharmaceuticals

5.Company:PPG Industries Inc (PPG)
Current Dividend Yield: 1.54%
Sector: Chemicals

Note: Dividend yields noted above are as of Dec 6, 2017. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long GIS and RY

Is Active Investing Better in Emerging Markets?

Active investing is not s good investment strategy for most retail investors. Passive investing trumps active investing in the developed markets. But does it make sense to follow active investing in emerging markets?

According to a recent article at CityWire, active investing makes sense in emerging market due to many reasons. The article notes some important justifications for active investing. From the article:

One of the first decisions any investor has to make is whether to invest with an active manager or seek to track an index. This is no different for emerging markets. However, we believe the decision is more complex for emerging markets, which have a number of idiosyncratic characteristics. Investors need to take this into account when making a choice.

The factors that influence the performance of emerging markets are often as much about external events as they are about internal events, and this is important when considering how to invest. Emerging markets will go up and down depending on what is happening globally as much as their domestic situation. For example, the global financial crisis had profound effects on emerging markets, even though it was largely a developed markets problem.

There is no question that these markets are more volatile than developed markets – around 1.5x, although there is some variance around that in individual markets and stocks. There are clear reasons for this: turnover is lower in most stocks. Equally, the free float for most emerging market companies is around 30-40% compared to 60-70% for developed markets. The free float is the number of shares available for sale to private investors, as opposed to – for example – company executives, or the government. Lower turnover and free float means that a pound going in and out has a greater impact on the share price of an emerging market company.

Source: Why it pays to be active in emerging markets, CityWire UK

The full article is worth a read.

Related ETFs:

  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard MSCI Emerging Markets ETF (VWO)

Disclosure: No Positions

Gold Offers Protection During Market Downturns

Gold is an important asset class that investors should not avoid. Though gold does not produce income such as dividends from stocks for example, they offer many other advantages. For example, gold has low co-relation to equities and traditionally offer downside protection to a diversified portfolio during adverse market conditions. When equity markets crash investors tend to flock safe-have assets such as gold.

During the recent global financial crisis, equity markets worldwide fell in tandem. However gold offered protection and yielded positive return for investors in the 2007-09 period as shown in the following chart:

2. Protection in a downturn

Gold has historically been used to provide potential tail risk mitigation during times of market stress, as it has tended to rise during stock market pullbacks. As shown below, gold delivered competitive returns and outperformed other asset classes during the 2007-2009 Global Financial Crisis. Many asset classes fell in tandem, but gold’s performance was positive. In addition, gold has delivered competitive returns and outperformed other asset classes during a number of other similar Black Swan events.

Click to enlarge

Source: The Role of Gold in Today’s Multi-Asset Portfolio, SPDR Blog

For some of the other advantages of owning gold please read the above-linked article.

Earlier:

Related ETF:

  • SPDR Gold Trust (GLD)

Disclosure: No Positons

Why Hold Stocks For The Long-Term: UK Equity Market Edition

Investors should always focus on their long-term goals and hold stocks for the long-term. Building fabulous wealth with equity investing needs patience and those investors that own stocks thru bull and bear markets are usually rewarded well by the market.

The following chart graphically shows the performance of UK equity market over many events since 2007:

Click to enlarge

Source: Seven deadly sins of investing, Investment Times, Hargreaves Lansdown PLC

During the peak of Global Financial Crisis(GFC) the benchmark FTSE 100 fell under 3,900 in March, 2007. Since then it has strongly recovered and continues to perform well despite political drama such as Brexit. The index closed at 7,300 on Dec 1st, 2017.

The key takeaway is that investors are better of ignoring short-term noises and events and instead keep their attention on the long-term.

Related ETF:

  • iShares MSCI United Kingdom Index (EWU)

Disclosure: No Positions