In today’s article we discuss investing in dividends in your self managed super fund (SMSF) and provide a guideline of what you should consider when either reinvesting your dividends or considering how to boost the dividend yields in your super fund.
Self-managed super fund investors should be investing in income-producing investments as well as investments that are likely to increase in capital value.
Recent Dividend Payments
One of the reasons that the ASX held up so well over the past few weeks is that over $17.6 billion dollars worth of dividends has been paid back to shareholders (refer to the table below). The major dividend payers have been BHP Billiton, Wesfarmers, CommBank and Woolworths.
TABLE 1: Dividend Payouts Over the Past Four Weeks (source: Goldman Sachs)
There are a further nearly $2 billion in dividends to be paid to investors by the end of October.
Bank Dividend Season
Banks have had a stellar run since bottoming in late June, with CommBank up 15%, ANZ up 20%, National Bank up 25% and Westpac up over 20%. Back in late September, with ANZ and Westpac in particular breaking out to 4-month highs, we suggested investors would do well to look to protect their capital gains, while holding on to their stock until the November dividend season.
The recent pullback from the September highs now gives investors the opportunity to accumulate the banks for their potential run into the dividend season. Banks that are due to pay dividends in November have pulled back between 3% and 9% from their September peaks (refer to the table below), with MacBank recording the biggest pullback. Note the Bank of Queensland rebounded today, surging 7% after a good report.
TABLE 2: Bank pullback from September Peaks (as at Open on 10-Oct-13)
The Dividend Trade
With the dividend season upon us and with the recent pullback in the banks, SMSF investors have an opportunity to participate in collecting dividend income and accumulating franking credits in their SMSF. Note the CommBank went Ex-Dividend on 19 August and is out of sync with the rest of the banks.
TABLE 3: Upcoming Bank’s estimated 2H Dividends (due in November), plus UBS and MacBank ratings (as at 24Sep13).
As we can see in the table above, the banks are due to go Ex-Dividend in November, providing second half (2H) estimated yields of between 2% and 3.4%.
Markets globally have been subject to selling pressure over the past couple of weeks, due to the US partial federal government shutdown which is costing around $US300 million a day in lost economic output and the impact is likely to grow over time, as concerned consumers and businesses stay on the sidelines. Additionally Congress needs to take action by 17 October to avoid the US breaching its $US16.7 trillion debt ceiling limit. House Republicans have sent a small group of negotiators to the White House in a move to increase the debt ceiling limit.
Traders speculating that the economic effects of the US government shutdown will be limited and the Federal Reserve will be more likely to continue its stimulus program until some time in 2014, could be well placed to take advantage of the current pullback, in order to invest in Aussie banks that are coming up for the dividend season.
The investor’s appetite for risk will dictate whether they establish a position before 17 October, the deadline for the US debt ceiling or before the US budget impasse is resolved. The more conservative investor may wait until these issues are resolved, however there are options strategies that can put you ahead of the crowd.
There are plenty of ways to trade these high yielding stocks, including:
• Buying the share outright – requires a large capital investment.
• Trade for capital growth into the Ex-dividend period using options, through Buying Calls, Buying Call Spreads or Selling Puts – note you will not qualify for the dividend unless you exercise your Calls.
• Buying Mini Long Warrants – gives you leverage to any capital growth in the underlying stock.
• Buying Mini Long Instalment Warrants – gives you leverage to any capital growth in the underlying stock, plus you qualify for the dividend (and franking credits).
• Buying either Capped Instalments or Self Funding Instalment Warrants – gives you a highly leveraged position and you qualify for the dividend (and franking credits), although they may be used to pay off the loan portion of the Instalment Warrant (refer to the relevant warrant PDS for details).
So you can do your homework and select the investment strategy that suits you or you can shortcut the process by referring to a professional for assistance and we at D2MX Advisory can help. Contact us at 1300 610 024 or email email@example.com.
Investing in your self-managed super fund for income should be treated as a business and these are just some of guidelines that you could consider to ensure that your SMSF investing is done profitably, systematically and efficiently, without emotion.
The secret to above average returns in your SMSF is measureable performance, consistency of returns and income, time and the power of compounding! In this article we have highlighted some guidelines that you can use to help your improve your income investing performance.
We here at D2MX Advisory can assist you with taking action to invest for the dividend season and we have strategies designed specifically to generate consistent income and returns, that are scalable. Contact us at 1300 610 024 or email firstname.lastname@example.org.
Post Note: Market globally have jumped overnight in anticipation of a resolution of the debt ceiling negotiations. However the partial government shutdown, which is costing around $US300 million a day in lost economic output, continues for a tenth day. Depending on how these negotiations unfold you may get another chance for the banks in the coming days.
The market has provided some excellent opportunities this year. There are a number of dividend investment opportunities setting up right now, that you could potentially profit from. If you would like more information please contact me at 1300 610 024 or email email@example.com.
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Investment Adviser – D2MX Advisor
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.