Sitting tight is paying dividends

THE gnashing of teeth and rending of garments over the turbulent stock market is only background noise for many Western Australians. They continue to stroll to the post box in the morning, collect their dividend cheques, and stick them on the fridge with a magnet.

The advice from many ‘strategists’ has been to plump for shares in growth companies, because the tax man now treats capital gains less harshly than dividends. What these savants failed to add was that there might be precious few capital gains. On the contrary, a lot of folk are now nursing losses. Those who were persuaded to use borrowed money to purchase stunted growth stocks have a problem – especially if they were playing in overseas bourses.

The argument was that boring Australian companies should increasingly adopt the US model of paying skinny dividends and enhancing the value of their shares by buying them back – in some recent cases financing the exercise by issuing debt paper. Not everybody, especially old gaffers looking for fully franked income, was bowled over by this trend. Instead, they sought out ‘value’ in solid companies with a history of good dividend distributions. And if the shares go up as well, so much the better. You do not have to look too far for examples.

AlintaGas introduced 80,000 Western Australians to the market, many of them for the first time, when the shares were floated at $2.25 two years ago. They are now trading at $4.15, not far from an all-time high, and offer a yield of 4 per cent. Although Foodland has been clipped by profit taking, the shares have doubled to over $18 and still yield 3.85 per cent. BankWest issued a profit warning last week, which badly bumped the high-flying share price, but the present yield is over 6 per cent. West Australian Newspapers is holding up well at $5.22 in a soggy media sector, helped by the 5.7 per cent dividend yield.

Bristile has given its holders a good run for their money combined with a 5 per cent return. Wesfarmers, although it has grown to be among the top dozen companies in Australia, has had the wings of its share price clipped from a peak of $33 to $27.80. Long-term shareholders are still quids in, and the conglomerate offers a return of 3.5 per cent, with perhaps more jam on the horizon. Woodside has been hard to follow, but a welcome dividend and special payment policy has lifted the total returns. Fully franked dividends are a remarkable, and sometimes under-rated, perk in our tax system. Low wage earners even get a cash rebate if they cannot use the imputation credits against income. The best companies usually manage to maintain or increase their dividends year after year sufficiently to keep pace with inflation. But remember, you should not fall in love with a share – it does not know you own it.

Some investors have chosen to take a little money off the table and put the proceeds in fixed interest securities or cash. There is nothing wrong with that.

Watching the nightly Wall Street carnage on CNBC is not recommended for those of a nervous disposition. Perhaps Reserve Bank governor Ian Macfarlane has been burning the midnight oil in front of business TV. It is odds on we would have got an extra quarter point on interest rates last week, were it not for the terrible turmoil among equities in the US and Europe. The Australian economy is still going gangbusters. Retail trade is running hotter than forecast, building approvals are higher than expected, and the pace of imports is beginning to be a worry.

What must have stayed Macfarlane’s hand, at least for the time being, is the fear that the destruction of wealth and the corrupt practices uncovered in the US could lead to a seismic shift in the global economy. The recovering patient might be wheeled back into intensive care.

What we are seeing is a relatively slow-motion crash. If the slump in the Dow Jones index had occurred in a single day, as it did in 1987, the prescribed medicine would have been big interest cuts by the Federal reserve and a tidal wave of liquidity.

This time, however, Alan Greenspan has very few shots left in the locker.

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