In today’s article we highlight the advantage of reinvesting dividends in your self-managed super fund (SMSF) and provide guidelines about what you should consider when either reinvesting your dividends or considering how to boost the dividend yields in your super fund.
SMSF investors should be investing in income producing investments as well as investments that are likely to increase in capital value. Today we consider the dividend reinvesting.
If you evaluate the strategy of reinvesting your dividends over an extended period you can see clearly that your investment performance would have been far superior, particularly in the period since the market bottomed at the end of the GFC in 2009 (refer to the chart below).
Chart 1: ASX 200 Performance versus the ASX 200 Accumulation index (source: d2mxIRESS)
The ASX 200 Accumulation index is a measure of the performance of securities in the ASX 200 index, taking into account income as well as share price movement, assuming that the dividends are reinvested.
Bank Shareholder Ownership
Banks comprise 28% of the ASX 200 index, but they overweigh in most retail share portfolios thanks to their consistent and rising dividends streams. The Commonwealth Bank, for example, has increased its dividends in ten of the past eleven years. The added bonus of outperformance if the dividends are reinvested, has justified the retail “over-ownership” of the banks, giving rise to CommBank (53%), Westpac (48%), National Bank (44%) and ANZ (41%) being owned substantially by retail investors.
Retail investors are prone to holding their shares for the long term and are generally loathe to trade their shares due to the capital gains tax implications, so the real driver of the bank share prices are the institutions. Institutional investors are more likely to trade the banks according to valuation, particularly as overseas funds have trouble qualifying for the dividends. We saw back in May the institutional portion of the market quickly sell-off their exposure to Aussie banks when the Aussie dollar plunged below parity with the US dollar.
The ASX ran up into early November, partly on the back of the banking majors coming into their dividend season. The ASX market has consolidated into the later part of November and this gives rise to another dependable trend which takes place from now through until to mid-December, owing in part to those dividends being paid to shareholders and to the market having a seasonal tendency to run up into late December.
Banks have had a stellar run since bottoming in late June, resulting in significant run-ups: 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 around the November dividend season.
Banks have a tendency to pull back by between 7% and 15% once they go Ex-dividend (see ANZ chart below). However with the seasonal bias for the market tending to be positive over the final six weeks of the year, any weakness in the banks can be used to accumulate stock.
Chart 2: ANZ Bank pull-backs around Ex-dividend in the past couple of years.
We have seen weakness in the Aussie dollar since late October, which has been a direct result of the US dollar strength due to the speculation that US Federal Reserve tapering will begin in the new year. This has resulted in selling in the Aussie banks over that period.
Chart 3: Aussie Dollar needs to find support for the Bank trade to work (source: d2mxIRESS)
Bank Stocks Have Some More Upside
Goldman Sachs recently compiled a note suggesting that the Aussie banks still have some more gains in them by year’s end, citing:
• The Aussie market has a tendency to run higher into late December, early January.
• The big three banks will be buying back $2 billion worth of their own shares as part of the dividend reinvest programs (DRPs), through until mid-December.
• Share holders will be receiving over $8.6 billion worth of dividend payments through until mid-December and if you factor in that 25% opt to participate in the DRPs, that will leave around $6.6 billion in cash to be redeployed into the markets, hence the reason for the seasonal bullish bias at this time of year.
• The ASX has a tendency to produce substantial gains in the final couple of weeks of December and the first week of the new year, with the average gain for that three-week period being 4.5%, with an 85% win rate over the past 33 years.
Yes, there are plenty of headwinds, including the US Fed tapering, the US debt ceiling and the strengthening US dollar, but the markets have managed to climb the “wall of worry” all this year and are on track to produce the best annual performance in a decade.
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 SMSF for income should be treated as a business and these are just some of the ideas that you could consider to ensure that your self-managed super fund 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 (which can be boosted by dividend reinvesting)!!
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 call 1300 610 024 or email firstname.lastname@example.org.
For investment ideas and recommendations on how to trade in this market, sign up for a free trial of the D2MX Daily Investing Report, which provides a daily serving of insightful market analysis from the D2MX Advisory team, including:
• Trade ideas and strategies
• Dividend enhancement strategies
• Market scans to watch
• International market analysis, and
• Highlights from the S&P/ASX 200
To request an obligation-free trial, call 1300 610 024 or email email@example.com.
Investment Adviser – D2MX Advisor
Also in this series:
Part 1: Boosting Dividend Yield in Your Self-Managed Super Fund (SMSF)
Part 2: Compounding in Your Self-Managed Super Fund
Part 3: Post-Election Investment Opportunities
Part 4: Simple Breakout Finder for Your Self Managed Super Fund
Part 5: Simple Trade Signal Setups for Your SMSF
Part 6: Protecting Your Self Managed Super Fund
Part 7: Investing For Profit in Your Self-Managed Super Fund
Part 8: Tracking Profits in Your Self-Managed Super Fund
Part 9: Investing in Dividends in Your Self-Managed Super Fund
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.