How Dividends Can Protect You
The market might be up and down, but dividends can be consistent. Another way of looking at it is that if the market is like quicksand, dividends are a rock to hang onto. The key to owning a diversified portfolio is that you can sleep at night, knowing that dividends are more than likely to be coming in, reducing your risk.
If you are interested in learning more about the Blue Chip Stocks and how to invest in this area read more here.
What Sectors Give Investors the Best Dividend Value?
Last week we highlighted our preferred Blue Chip Banks, which have an average dividend yield of almost 6%, and more when you include the value of franking credits. Inflation might be running hard, but this factor alone allows you to tread water.
We also like the big commodities producers of this world.
Why? Because they are net beneficiaries of inflation. It is the cost of the commodities that they produce that is going up.
Sure, their own costs are going up, but it’s a net positive for them because they have what’s called operating leverage from the huge scale of their operations. Add onto this the fact that these resources giants continue to pay supersized dividends, overcoming the mistake they made in the past of taking shareholders for granted when they went all-out for expansion.
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What Do I Need in my Portfolio?
You need to own the big banks and the big producers in your portfolio. You also need to own high growth Small Caps to stay ahead of the curve. That’s the power of diversification and not being caught in the market’s herd mentality.
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What are the Current Market Concerns?
What can we say about RBA Governor Philip Lowe’s decision to raise official overnight interest rates only 25 basis points to 2.60%, rather than the 50 basis points expected? We must note that the RBA still anticipates inflation to be at 7.75% over 2022, declining to just over 4% in 2023 and 3% the following year.
It’s true that despite having the same unemployment rate as the US, we do not have pressure on wages growth, a factor attributable to a negligible manufacturing sector. The bigger point is that Lowe is trying to have it both ways, playing a wait and see approach, but also saying that he’ll do what it takes to get inflation down. When aggregate demand is running at 10% a year, as measured by nominal GDP growth, which is at a four decade high, a cash rate of 2.6% does not cut it!
As we have been pointing out for some time, the bigger picture is how we got into this situation. Low interest rates have been a function of a global savings glut, first mentioned by then Fed Reserve Governor Ben Bernanke in 2006. This is a function of huge productivity gains in in China in particular and excess funds going straight into US Treasuries. Interest rates going up is a reflection that this is unwinding and will happen for an extended period.
Read more about Small Caps Investing and why we picked these ASX Small Cap gems and their outstanding performance.
What Should I be Buying?
You need to be playing offence and defence.
You need to be buying small caps which provide your portfolio with growth and are being taken over at a rate I’ve not seen before.
You also need to be providing yourself with income that matches inflation – read the big banks and the big resources, plus some other Blue Chip stocks, which we analyse in BCV Issue 114. I’ll let you get into it!
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