The Power of Dividends

Just like interest, dividends are a powerful addition to ones investing hand.

When re-invested in good companies they can make an average return a spectacular one over the long-term.

In the Share Investor Portfolio, which has been in action in one form or another for the last 7 years I have received just over NZ$113,000 in dividends and tax credits, not bad for a portfolio that is worth only around $320,000 on today's valuation and one that has been considerably smaller in its early days.

All of the cash has been reinvested back into the portfolio, as have the tax credits which I am able to use fully.

The bulk of the dividends come from just one stock, Sky City Entertainment Group [SKC.NZ] making up over half the booty, then much smaller amounts from The Warehouse Group [WHS.NZ] Freightways Ltd [FRE.NZ] and Mainfreight [MFT.NZ] until they taper off to just a couple of thousand for the smaller stock holdings.

While dividends are not always a sign a company is doing well, often a higher dividend payout reflects that a company's cash turnover is a good one and then they are able to pass that turnover onto the shareholder.

A high dividend though should never be the only criteria for buying a stock.

I expect the dividend contribution to the Share Investor Portfolio to at least pay enough as to provide enough income over the next ten years to double the value of my investment, regardless of any capital value fluctuations from week to week and year to year.

Just what a good business should do.

Recent Share Investor Reading

• Capital Gains tax a millstone for New Zealand Inc
• Share Investor Short: Warehouse Group yield worth ...
• Stock of the Week: Mainfreight Ltd
• Share Investor Interview: Sky City CEO, Nigel Morrison
• Questions to Mainfreight's MD Don Braid
• Not so fast Davy Boy

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c Share Investor 2009

Capital Gains tax a millstone for New Zealand Inc

A question of intellectual dishonesty, economic illiteracy and empire protection by politicians and their hangers on currently surrounds the topic of a capital gains tax on investment housing.

We all know why investment housing is so popular and does so well in this country. There are countless tax advantages that this form of investing has over every other investment class, not the least one being the lack of a tax on capital gains, so it is bleedingly obvious as to why every Tom Dick and Harriet has an investment property.

The lax of taxes helps make for a successful investment, any investment, a third form economics student will tell you that.

Stockmarket investing is taxed to the hilt, as is investing in your own business, as are your savings in a bank or in a retirement scheme.

We all know how badly these investment classes, and our economy have suffered as a result of high taxes, while at the same time investment property is favoured above all by having no State hand reaching into your pocket.

So you think I want to tax investment property to even out the score?

Hell no.

Here is something quite radical and perhaps a little outside the square. Why not drop taxes completely on all asset classes?

That way investors will have a true choice about which investment they might want to make based on its merits or otherwise and if they invest in a business directly or a business indirectly on the stockmarket or put money into a savings account, the money is more likely to go into something productive rather than an over priced investment house with phony tax advantages and it will lift the economy as a result.

Aint that what we need, especially right now?

Recent Share Investor Reading

• Share Investor Short: Warehouse Group yield worth a look
  
• Stock of the Week: Mainfreight Ltd
• Share Investor Interview: Sky City CEO, Nigel Morrison
• Questions to Mainfreight's MD Don Braid
• Not so fast Davy Boy
• Woolworths supermarket consolidation an indicator of a move on The Warehouse?

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Share Investor Short: Warehouse Group yield worth a look

I don't usually do this here but I want to take a look at a good short term play.

Yeah OK, my attention span is a little limited lately due to the arrival of the stork.

Dividend stripping * is something worth doing though. That is, getting in early when a good dividend is announced and riding the share price upwards before the dividend is paid or holding on to collect the dividend then ditching the stock, depending on how you think the market will treat the company post dividend.

I may or may not have done this over the years and if I did it certainly wasn't my intention to do so, yeah OK.

The Warehouse Group [WHS.NZ] just announced their 2009 Full Year profit last Friday and along with it came a surprise to the market, a special dividend of 10c per share. This comes on top of the usual 5.5c a share paid.

The Warehouse have had a history of special dividends over the years but haven't been able to pay one for many years because of cash flow problems due to their ill-fated expansion in Australia.

With cash flows up considerably this year the dividends are now rolling in again.

If you add the 33% imputation credits and are able to use them to offset taxes then you are in for a payout of :

15.5c dividends + 5.11c tax credits = 20.61c , which equates to around a 4.85% gross return at a closing share price on Friday 11 Sept of NZ$4.25 - the net return is obviously higher if you are able to fully use the tax credits.

An excellent short term payout for doing next to nothing and it is better than a term deposit because it does not take a full year to payback.

There is also the probability that those after the dividend will push up the stock price to enable you to get out with a good capital gain before the dividend is paid, if you wish to do so.

Of course, and I have to get this in before I wrap it up. If you are a long-term shareholder in the company your return for the year would have been a 31c per share net dividend and the possibility of more than 10c in tax credits - a plus 10% net return for the year based on my share purchase price.

Long term wins again but who says you cant have the best of both worlds!

* Of course as one reader pointed out below, the process of dividend stripping, if the intention is to do that, the capital gain that you make is taxable.


The Warehouse Group @ Share Investor

Woolworths supermarket consolidation an indicator of a move on the Warehouse?
Stock of the Week: The Warehouse Group
Warehouse 2009 interim profit a key economic indicator
When will The Warehouse bidders make their move?
Long vs Short: The Warehouse Group
Warehouse bidders ready to lay money down
The Warehouse set to cut lose "extra" impediment
The Warehouse sale could hinge on "Extra" decision
The case for The Warehouse without a buyer
Foodstuffs take their foot off the gas
Woolworths seek leave to appeal to Supreme Court
Warehouse appeal decision imminent
Warehouse decision a loser for all
Warehouse Court of appeal decision in Commerce Commission's favour
MARKETWATCH: The Warehouse
The Warehouse takeover saga continues
Why did you buy that stock? [The Warehouse]
History of Warehouse takeover players suggest a long winding road
Court of Appeal delays Warehouse bid
The Warehouse set for turbulent 2008
The Warehouse Court of Appeal case lay in "Extras" hands
WHS Court of Appeal case could be dismissed next week
Commerce Commission impacts on the Warehouse bottom line
The Warehouse in play
Outcomes of Commerce Commission decision
The fight for control begins soon

Share Investor Forum - Discuss this Stock

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c Share Investor 2009

Stock of the Week: Mainfreight Ltd

In this Stock of the Week I am going to look at Mainfreight Ltd [MFT.NZ] a particular favourite of mine because of its superior management and outstanding results over a long period.

While the stock has been substantially cheaper over the last year (see chart above) and it has been at a high of over 8 bucks over the last 2 years, it is still around 40% off that high and that is my overriding reason for including it in this series.

I bought some more in July at $4.20 after watching it plumb the depths of $3.25 months earlier.

At close of market today the stock was up to $5.13 but has been trading under 5 dollars for the last few months.

The stock is still undervalued in my opinion. Its recent profit announcement wasn't a good one but good management has so far kept the deleterious effects of the global logistics slowdown to a minimum.

Long term the company has grown considerably and once the global recession is over this growth should continue as it has done historically.

Until then prospective investors should see the low share price as an opportunity to make their move.

Please keep in mind the stock can be quite volatile because of relatively low turnover and could of course get cheaper from here.

Once again, good luck!

Disclosure: I own MFT shares in the Share Investor Portfolio

Stock of the Week Series

Fisher & Paykel Healthcare
Xero Ltd
Auckland International Airport
Sky City Entertainment Group
Burger Fuel Worldwide
Michael Hill International
Contact Energy Ltd
The Warehouse Group
Fisher & Paykel Appliances


Mainfreight @ Share Investor

Questions to Mainfreight's MD Don Braid
I'm Buying: Mainfreight Management delivers the goods
Mainfreight Annual Report Packs a Punch
Analysis - Mainfreight Ltd: FY Profit to 31/03/09
Mainfreight VS KiwiRail: The Sequel
Long VS Short: Mainfreight Ltd
Why did you buy that stock? [Mainfreight Ltd]
Mainfreight 2008 Annual report worth reading
KiwiRail will cost Mainfreight
Mainfreight keeps on truckin
A rare breed
Share Investor's 2008 stock picks

Discuss this Company @ Share Investor Forum


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c Share Investor 2009