Why you should consider a Small Cap dividend portfolio
In Australia and the rest of the developed economies, interest rates are declining to close to zero at all points of the yield curve, indicating how low expectations are for economic growth. But you’ve got to get income somehow. If not, you might have to live off your capital, which is not too bad if it’s growing. If it’s not, then you need yield.
Try finding a term deposit that has a rate above 2.5% and your money is not locked up.
You can’t get 2% from a govt bond. Even if you do, you’re taking price risk. If interest rates go up, the value of your bonds goes down.
What about the risks in shares?
There are risks, but the dividend stocks we recommend have delivered an annual cash yield of 7% before you include franking credits, rather than a yield of 2% from a Government bond. Plus, you get capital growth potential, unlike a bond.
What we’re talking about is investing for the long-term. Because that’s what investing for income is about. We’re helping you forget about the daily movement of share prices.
Dividends represent an important price signal for investors. When there is increased uncertainty and the market comes under pressure, if the company is able to maintain and even increase dividends, this augurs well for your portfolio’s ability to weather the storm.
Things do change. Circumstances change for all companies. Under the Radar Report’s team of analysts monitor what’s going on at the operational level and what’s going on at the price level.
Let us worry about when to BUY, SELL or HOLD, because these are not set and forget investments.
Start building a small cap dividend portfolio
Next week we’ll be showcasing a number of Small Cap dividend payers, based on our selection criteria, which we outline in more detail.
To get you started, one example of a stock we have covered for a long time is the shade cloth manufacturer Gale Pacific (GAP). This has a solid but cyclical business and sells to major markets in North America and Asia. It has a strong balance sheet and pays consistent dividends.
You wouldn’t bet the house on it, but you could buy it for a bit of income that could help pay some bills. If you’re looking for $200 a year in income you buy 10,000 shares for $3000 you’re getting 1 cent a share in dividends every six months.
Above we include our most recent dividend portfolio tables, but we showcase all of them from January 2016 onwards on our website. These are portfolios that we have recommended in the past and give you a good idea of what investing for dividends can do. Next week we present a new dividend portfolio.
The power of diversification, which evens out individual returns.
We had a couple of poor performers, including GTN (GTN) and Capral (CAA) and these have weighed on the portfolio, but this has been more than made up for by stocks like Data3 (DTL), which has doubled and strong diversified businesses like Ruralco (RHL) and Ingenia Communities (INA) which have produced average annual returns of close to 50%.
Three stocks in our October 2018 portfolio have been taken over. You would prefer to takeover a company with a strong balance sheet, meaning net cash or little debt than one with material debt levels, representing an increased cost to the purchaser. It’s no accident that one of our criteria is a strong balance sheet, complimented by good operating cash flow.
Capital return does the heavy lifting in the short-term.
The cash yield is relatively stable but most of the return comes from the overall uplift in the price, which is what happens in the short-term.
Consider re-investing dividends for the long-term.
If you re-invest your dividends this will work to supercharge your returns over the long-term. Albert Einstein is rumoured to have said that compound interest is the eighth wonder of the world, but we doubt this. Even so, you can see its effect when you reinvest dividends. If you invested $1000 and achieved an 8% annual return every year over forty years, made up of 3% dividends and 5% capital gain, this would have appreciated to $21,720 with re-invested dividends and $7,040 without re-investment.
Dividends aren’t everything.
A strong balance sheet is most important. We have invested in a number of companies (including two in media and one in contracting) that made efforts to repair their balance sheets by forgoing dividends. These companies subsequently delivered great cash flow.
Do not be overexposed to any one sector.
The great thing about Small Caps is the variety of different sectors on offer, which is sharply constrasted by the concentration of exposure in the ASX 200 to banking and resources. The mistake we made in one portfolio was investing in two companies in the one sector (media) – you do not need to be overexposed in any one sector.