When providing advice we have an old saying:
Turnover and sales are vanity, profit is sanity, but cashflow is always king.
We concentrate on the cashflow of the company from the underlying business, to provide ongoing dividend income. We can then use the pool of cash, accumulating from dividends, to purchase other equities.
The key is to remain calm and stick to your investment strategy when sharemarkets are volatile:
- Hold the course
If you react to short-term conditions, by selling your investments, any losses become permanent, and you will miss the growth opportunity as the market recovers. Remember, we focus on quality dividend income and this doesn’t change on a daily basis, although share prices do. Knee jerk reactions can take investors further away from their long-term goals.If your goals and circumstances haven’t changed, nor should your investment strategy.
- Know your long term financial plan
You need to understand what your investment objectives are, to remove emotion (especially fear) from ANY investment decisions.
The sharemrket can be a roller coaster, so when markets tumble, the potential to earn impressive, long-term capital gains and good dividend income usually still remains.
At AAG, our investment philosophy has always been to source income paying investments that are sustainable in times of economic or political upheaval. Focusing on income allows an accumulation of funds to invest for your future.
Share Market Investment Strategy
There are many different sharemarket investment strategies, but ultimately they all aim to build wealth through share price growth and/or the generation of cash income from dividends. Most companies pay two dividends a year.
Before investing, you should consider your investment goals and tailor your strategy to suit. You should also have a clear idea of the circumstances in which you might need to change your strategy or sell shares.
Income, Growth or Both
Investment strategies commonly focus on income, growth or a combination of the two.
- Income:Investing for income targets shares that pay high dividends. Using franking credits (see below) can also increase the value of dividends. At AAG we favour an income based strategy in the form of high dividend paying shares, targeting 5% dividend income (the gift that keeps on giving). We can then use this accumulating cash pool to choose other investments based on share prices at the time of investing.Many of the dividend income paying stocks that we target, also have a growth component.
- Growth:Growth investing targets share prices growing at a rate higher than inflation. It favours investments that are likely to see strong capital growth rather than paying dividends. Investing solely for growth is an all-or-nothing strategy, what if you get it wrong? Not only will you erode capital, but you could also miss out on dividend income.
- Combination of Income and Growth:In the current market environment, most of our share market investment strategies aim to achieve ~5% dividend income with ~3% growth. We believe this is a sound and responsible target that should outperform in the long term.
- Franking credits:Some dividends are issued as fully or partly franked. This means they carry imputation or ‘franking’ credits. These credits can be used to achieve a tax offset or a reduction in the amount of tax to be paid. If your marginal rate of tax is lower than the company tax rate (30%), you may be able to use the excess franking credits to reduce the tax on other sources of income.
What about when markets are tumbling?
AAG are always here to provide advice, guidance and/or specific stock recommendations. We have direct share market access via an Intermediary Agreement with Canaccord Genuity, enabling us to be certain of share buy and sell prices. We can “see” your share investments and provide timely advice on specific stocks if/when needed.
And always remember…
- Skilled investors stick to their flight plan – stay the course and stay on target;
- Look for gifts that keep on giving in the shape of dividend income paying streams;
- Don’t waste any downturn – history has shown them to be only temporary;
- Opportunities are always there, sometimes they just require a closer look; and
- Have realistic market expectations.
For further information please see this White Paper: