Sunday, June 1, 2014

Which Australian Bank Pays The Best Dividends?

Australian Banks have long been popular investments among Aussie investors. One of the reasons has been the fact they have been among the best paying dividend shares.

Below is a table of the 6 largest banks listed on the ASX. They are ordered according to which bank pays the best dividends. All of the distributions paid by  shares listed in the table below are fully franked.

ASX
Code
Company Name Current
Price
Dividend
Yield
Annual
Growth
Rate
Payout
Ratio
NAB National Australia Bank $33.49 5.9% 6.8% 80%
BEN Bendigo and Adelaide Bank $11.73 5.3%9.5% 76%
ANZ ANZ Banking Group $33.49 5.2% 12.6% 70%
BOQ Bank of Queensland $12.00 5.2% 3.6% 90%
WBC Westpac $34.42 5.2% 13.7% 78%
CBA Commanwealth Bank $81.59 4.7% 12.4% 75%

As you can see the National Australia Bank is a clear leader in terms of yield, but there are a number of other factors to consider.

Dividend Growth Investing

While the current dividend yield is important for those investors looking for income, the level of future payments should be just as important. If you plan on holding your shares for the long term, growth in future dividends could dwarf your current yield.

In the table above, the fifth column is the average annual growth rate of dividends for bank shares over the past 5 years. Although some investors liken looking at historical figures as akin to driving while looking in the rear view mirror, sometimes history can be a good predictor of the future.

The table shows that although NAB shares currently have the highest rate of return, they also have the second lowest growth rate (behind Bank of Queensland). Westpac, ANZ and Commonwealth Bank each have historical growth rates over 10%.

Dividend Yield Is A Function Of Share Price

But the amount of the payment is only one half of the dividend yield equation - share price is the other. As the price goes down, the yield goes up (and vice-versa). So the cheaper you can buy your shares, the higher the yield.

Of course, sometimes a high yield (and its corresponding low share price) is a vote of no confidence from investors. It may be that investors are concerned about the future prospects of the company. Make sure you do your research and don't invest solely on the basis of a good dividend yield.

Will The Dividend Be Maintained?

Speaking of which, the final column of the table is the payout ratio. This tells us what percentage of profits are being paid out to shareholders. The lower this percentage is, the greater the chance that a company will maintain or even grow its distributions in the future. If that percentage is too high it may mean the dividend will need to be cut if there are any future problems at the company. A lower payout ratio means there is more of a buffer against leaner times.

Do Your Own Homework

What is presented above only scratches the surface. Make sure you do your own research before making any investment. Just remember that a poor investment could lead to a large capital loss in the future which will more than offset the good dividend yield you see now.

Sunday, May 25, 2014

What Are Exchange Traded Funds And How Do They Work?

In his 2013 annual letter to shareholders, Warren Buffett put forward some ideas on ETFs. He discussed how in his will he's left instructions for 90% of the money which is to be held in trust for his wife to be invested in (low cost) ETFs. If one of the most successful investors in history is recommending exchange traded funds, maybe the rest of us should have a closer look as well.

What Is An ETF?

It's a product which provides investors with relatively low cost exposure to a broad range of companies or other invest-able assets. They are traded on the stock market just like the shares of listed companies.

An ETF tracks an index like the ASX300 or the price of a commodity like gold.  This means that investors should receive the same return as they would if the held all of the shares which make up the index, or in the cast of something like gold, it would be similar to buying gold.

Do Exchange Traded Funds Pay Dividends?

Whether an ETF pays dividends will depend upon the underlying assets it holds. If the fund owns shares in dividend paying companies then these will usually be distributed to fundholders.

If the underlying asset does not produce any income (commodities for example) then there would be no distributions. An investor would be relying on movements in the underlying asset's price to provide capital gains in their investment.

How To Buy Exchange Traded Funds

As already discussed, ETFs trade on the stock market just like normal shares. This means they can be bought and sold through your stock broker just like normal shares. And you can view their prices in the financial pages of newspapers, in the online financial press and through your online broker's website.

How Many Exchange Traded Funds Are There?

As I write this, there are over 70 ETFs listed on the Australian Stock Exchange. They cover areas such as:
  • Various Australian share price indexes
  • Specific sectors of the Australian stock market
  • Various international markets and their sectors. This can be a cost effective way of buying international shares.
  • Particular investing strategies (eg value investing, high dividend yield, etc)
  • Various currencies
  • Cash and fixed income
  • Commodities

The complete exchange traded funds list is published on the ASX website.

Read more here.

Saturday, May 17, 2014

Cheap Shares - 3 Companies Worthy Of Further Research

I am drawn to cheap shares as a result of my having both feet planted firmly in the value investing camp. Of course cheap can be a somewhat subjective term with different meanings for different investors.  However, a good starting place for me is normally to begin with stocks trading at or close to their lowest price over the past 12 months.

Here is a list if 3 companies whose shares are trading close to their lowest price over the past year and in which I intend to conduct further research.

ASX Code Company Name Current Price 12 Month Low
NOD Nomad Building Solutions Ltd 0.047 0.04
KSC K&S Corporation Ltd 1.31  1.28
WEB Webjet Ltd 2.33  2.30

Nomad Building Solutions Limitd (ASX:NOD)

According to it's website, NOD is a business "specialising in remote and regional development, construction and project management across Australia".

NOD is currently trading at a market capitalization of around $13m. While NOD is currently losing money, the most recent report to the ASX said they had $8.3m in cash. The company also has tax losses of $27m and $17m in franking credits on it's books. If the company can return to profitability, these tax losses and franking credits will add significant value.

I haven't quite my head around this one yet, but it looks like it's worth some further iinvestigation.

K&S Corporation Limited (ASX:KSC)

K&S Corporation operates a transport and logistics business.

What initially caught my attention with KSC is that it's trading at a discount to its $1.87 of net tangilbe assets per share. Historically it's had strong free cash flow and consistently paid out fully franked dividends.

The reason the share price has fallen is a drop in profitabilty in the most recent half year. I need to find out more about the reason for the fall in profits.

Webjet Limited (ASX:WEB)

Online travel agent Webjet is currently trading just a few cents above its yearly low share price. This is despite the company confirming it's still on track to deliver EBITDA of $21.5m this financial year.  As far as I can work out, this would put the company on a price earnings ratio of about 13.  This seems low for a company with a good track record of growing profits. Another one for the to do list.

More Homework

While each of the companies listed above has made it onto my short list, there is still much more work to do. It's always worth remembering that like all investments, cheap shares are often cheap for a reason.

Wednesday, December 4, 2013

National Storage REIT Float

Another participant in the feeding frenzy that is the IPO market right now is National Storage REIT.

An investment in this float is probably more for those interested in income via distributions rather than the excitement of stag profits on the opening day of trading. This business looks like the more boring but stable kind.

According to the prospectus, the REIT "will be the first independent, internally managed and fully-integrated owner and operator of self-storage centres listed on the ASX".

The group currently owns or operates 62 self-storage centers across Australia.

The offer is for 126.3 million stapled securities at a price of 98 cents each.

At the offer price of 98 cents, National Storage REIT will be capitalized at $240 million upon listing.

The forecast earnings per security is 7.8 cents with a distribution yield of 8%.

The offer is actually for stapled securities. Each stapled security will be made up of one share of APN National Storage Property Trust (an unlisted property trust) and one share in National Storage Holdings. If you want to know more about the structure of the companies involved and who owns what, it is probably best that you download the prospectus and have a read for yourself.

The National Storage share offer opened last week and is expected to close on 16 December with shares commencing trading on the Australian Stock Exchange on 19 December. The company will trade under the ASX code of NSR.

If you like the sound of this investment and would like to read more of the details, you can download the National Storage REIT prospectus here.

Tuesday, November 13, 2012

How To Buy Shares Without A Broker

A particularly frugal friend approached me recently wanting to know if there was any way to buy shares without the need to pay brokerage fees.

Well the short answer is you can't.  According to the Australian Stock Exchange website:

"All shares listed on ASX can only be bought or sold through a broker. A stockbroker acts as your agent to buy or sell shares on your behalf, for which a fee is charged."

This statement is clear and unambiguous.  However, it got me thinking.  There are actually a few exceptions to this rule.  The exceptions are all share purchase transactions in which the ASX is not directly involved.

So The Long Answer Is Yes ... But In Very Limited Circumstances

There are a number a scenarios where you can buy shares without paying a stock broker.  But just because you can, it doesn't mean you should.  But more on that later.

Dividend Reinvestment Plans

The first option is available to investors in companies which operate a dividend reinvestment plan (or DRP).

Under a DRP, an investor is able to forgo their cash dividend and instead receive new shares to the same value.  As an added bonus, some dividend reinvestment plans issue these shares at a discount to the prevailing market price.

So if you're an existing shareholder of a particular company and you'd like to increase your investment in that company, this can be an effective way of doing it without paying brokerage.  Just be aware that not all companies operate DRPs.

Read more in what are dividend reinvestment plans.

Share Purchase Plans

Share purchase plans offer you another way to increase your existing shareholdings without paying a broker.

Under a share purchase plan (SPP) a company's existing shareholders are invited to buy more shares, normally at a discount to the current share price.  Just like DRPs discussed above, there is no brokerage or other commissions payable on the share purchase as you are transacting directly with the company.

However, also like DRPs, you need to be an existing shareholder of the company.

Rights Issues

Rights issues are similar to share purchase plans in that you can buy additional shares in a company without paying any brokerage.  The main difference to a SPP is that under a rights issue, the number of shares you're entitled to is in proportion to your current shareholding, whereas with a SPP this is not the case.

Share Floats/IPOs

When a company first lists on the Australian Stock Exchange, they normally offer shares to the public as a way of raising capital.  Once again, since you are transacting directly with the company you will pay no brokerage.

If you are interested, here is a list of upcoming share market floats.

Saving A Little Could Cost You A Lot

As I said at the beginning of this article, I don't believe that saving money on brokerage fees should be a primary factor in your decision of which shares to buy.  Saving $20 or so in stock broker's fees may turn out to be false economy if the underlying investment does poorly.

What do I mean?  Well, each of the cases I've described above are very specific and somewhat opportunistic.  If it were me constructing a share portfolio, I wouldn't be restricting my purchases to DRPs, SPPs, rights issues and new floats.  I'd be looking for companies trading at attractive prices at the time I was ready to purchase.

So there is your long answer.  You can buy shares without a broker.  But not just any shares and not all of the time.

Read more about how to buy shares.

Thursday, November 8, 2012

Why I Don't Like Dividend Reinvestment Plans

In my last post I discussed dividend reinvestment plans.  I know they are popular with some investors - in fact a quick search on Google yielded a number a websites devoted entirely to dividend reinvestment.  And while I can understand the attraction for some investors, DRPs are not for me.

So in this post I will discuss some of the disadvantages that I see with these plans.

To recap, a DRP allows existing shareholders to increase their holding by forgoing their cash dividend payments in exchange for new shares in the company.  There is no brokerage payable and to top it off, the shares are sometimes issued at a discount to the current market price.

So what's not to like?

Don't get me wrong.  There's nothing fundamentally wrong with dividend reinvestment plans.  It's just that they don't suit me.

Buying Shares When I Want To

I like to choose when and where I invest my money.  Dividend reinvestment limits my ability to do that.

Under most plans, shares are issued a couple of times each year at whatever the market price happens to be when the dividend is paid.  It could be that at the time the shares are issued (and therefore the price is set) I consider the shares to be too expensive.  There could be another company I'd rather invest my money in.  Or I might consider the market overall to be too high.  I might like to hold onto the cash for a while until a suitable investment opportunity arises.

By participating in dividend reinvestment plans, I lose that flexibility - the flexibility to buy the stock I want at a price I think is reasonable.  Instead, I have to take whatever the market says the price should be at the time the dividend is paid.

Too Much Paperwork

When you're being allocated small parcels of shares, a couple of times each year, under multiple DRPs - there's a lot of stuff to keep track of.

While this may seem trivial to those of you with superhuman powers of organization, for the just of us it can be a real hassle.

I admit it.  I'm not terribly well organized.  I love researching little-known companies, reaching for value in obscure places and relaxing while watching my stock portfolio grow.  But the administration side of things bores me to tears.

I dread tax time - the time when I need to find all of the documents which tell me which shares I bought and sold, at what price and when.  And this is where dividend reinvestment plans can be a pain.  Imagine I own shares in a company for 10 years and in each of those years the company pays 2 dividends and for each of those dividends I participate in the DRP - that's 20 individual purchases, plus the initial purchase.  That's 20 different capital gains calculations (I still do my own tax).  That's a nightmare.

Okay.  So maybe I could be a little more organized.  Maybe then tax time wouldn't be such a pain.  But it's still something you need to think about.

Don't Just Buy For The DRP

There are lots of factors to look at before making an investment in the share market. If you do like the idea of dividend reinvestment, by wary of allowing this the cloud your judgement.  With any prospective investment I'm always weighing up the price I have pay against the value I'll get.  To me, DRPs are a very small part of the value side of the equation.

I'll leave you with one last thought.  If you elect to take your dividends in cash like I do, then make sure you don't let them go to waste.  I make sure any income from dividends gets held separately from my day to day spending money.  I still want to reinvest them - just on my own terms.

As I said at the beginning of this post, I know that dividend reinvestment plans are popular amongst some investors.  I'd be curious to hear what others think.  Do you like DRPs?  Why? Or why not?

Tuesday, November 6, 2012

What Is A Dividend Reinvestment Plan?

Dividend reinvestment plans (or DRPs) offer investors a way to gradually increase their stake in a company.  Instead of receiving a cash dividend payment, investors receive an equivalent amount in the form of new shares in the company.

You Don't Have To Participate

Dividend reinvestment plans are voluntary.  By default you will not participate in the DRP and will instead receive all of your dividends in cash.

If you would like to participate in a company's DRP, you will need to notify the company.  They will normally send out the forms not long after you buy your initial shares in the company, or in the lead up to a dividend payment.

In addition, most plans allow you to receive only part of your dividend payment in the form of shares with the balance received as cash, if that is something you're interested in.

Cost Effective

One of the main benefits of dividend reinvestment plans is that there's no brokerage fees payable.   This means that you can grow your investment in a particular stock gradually over time without paying any commissions.

Another benefit with some plans is that they issue the new shares at a discount to the current share price.  Discounts are normally around 2.5% or 5%.

An Example

Let's look at a real world example.  Woolworths (ASX:WOW) most recent dividend payment allowed investors to reinvest their dividends at a price of $28.882297 per share.  The amount of the dividend (per share) was 67 cents.

If you held 300 Woolworths shares at the time the dividend was paid, you would be entitled to 6 new Woolies shares.  How does it work?
  • Total dividend paid:  $201
    This is the total amount of the dividend to which you are entitled (300 shares by 67 cents).
  • Shares issued:  6
    This is the number of new shares to which you are entitled under the DRP ($201 divided by $28.882297, rounded down).
  • Total cost of new shares:  $173.29
    This is how much the new shares cost.
  • Amount carried forward:  $27.71
    This amount is held by the company and is added to the dividend amount used in the next issue of shares under the DRP.
The "Amount carried forward" figure above may need some explanation.  Dividend reinvestment plans only operate in whole numbers of shares.  Since the cost of the shares issued almost never matches the amount of the dividend, the leftover amount is held by the company to be used for the next dividend.

Tax Implications

Even though you don't actually receive the dividends in cash, you still need to include them on your tax return as income.  You are also entitled to and franking credits.  (Please note, this is just my understanding how Australian tax law operates with regard to dividend reinvestment plans.  However I'm not a qualified tax professional so make sure you get your own advice.)