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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. Our dividend portfolios have delivered strong cash returns as well as capital appreciation.
To emphasise what I’m talking about, find me a term deposit that has a rate above 2.5% and your money is locked up for a period. You can’t get 2% from a government bond. Even if you do, you’re taking price risk. If interest rates go up, the value of your bonds goes down. Close to 50% of the small caps Under the Radar Report covers pay dividends and the average dividend yield is for those stocks is 4%.
Under the Radar has produced six small-cap dividend portfolios. Mistakes, we’ve made a few, but the point is that the combination of dividends and diversification has worked.
On average we have generated a return of 12.5% a year, which compares to the ASX All Ords Accumulation index (includes dividends) annual return of 9.5% and the ASX Small Ords average annual return of just under 6%. Below we show you a recent portfolio from October 2018, which returned 19% over the past year versus the ASX All Ords 10%, but first three small cap dividend stocks for you to consider.
Forecast dividend yield 6.2%
The Tasmanian based lender is no AfterpayTouch, but its FY19 result demonstrated the group’s consistent profitability from which it pays big dividends, which is why has been a perennial inclusion in our dividend portfolios. As expected the final fully franked dividend was maintained at 14.5 cents, taking the full year to an unchanged 28.75 cents.
With the group growing home loans at twice the market rate it was good to hear management is going to further increase its focus net interest margin management. That is, not sacrifice profitability for growth’s sake.
Forecast dividend yield 6.1%
The Queensland based regional lender’s origins date back to 1966 when it was the Burnett Permanent Building Society. Over time it evolved into its current form via a number of amalgamations with other building societies. The bank primarily serves the retail customer segment and provides the typical range of financial products including deposits, home loans, credit cards, insurance and superannuation.
With a strong capital position and sound asset quality we believe Auswide should be able to at least hold the FY19 fully franked dividend of 34.5 cents in FY20 assuming the economy doesn’t fall off a cliff. At current levels the stock represents reasonable value trading at an estimated FY20 PE about 13 times and paying a forecast 6% yield which is particularly appealing in a low interest rate environment.
Forecast dividend yield 6.8%
This stock has the highest dividend yield of the three, which accounts for the greatest risk. Diversification is your friend when you go up the risk cover. We have covered the shade cloth manufacturer for a long time, so we know the business well, which is solid but cyclical, selling its products to major markets in North America and Asia. It has a strong balance sheet with net debt of $25m and has paid dividends fairly consistently.
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 one cent a share in dividends every six months.
In Under the Radar Report’s issue next week we present a portfolio that we are recommending given current conditions as well as the criteria that we use to select dividend stocks for a portfolio. Below are some take-outs from having invested for dividends over a long period.
The power of diversification, which evens out individual returns.
We had a poor performers including Capral (CAA) which weighed on the portfolio, but this has been more than made up for by stocks like Ruralco (RHL) and Ingenia Communities (INA) which have produced average annual returns of close to 50%.
Takeovers a feature.
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.