Has the Australian Stock Market Crash Finished?

Is dividend investing still a viable strategy?

For as long as I can remember, it has been general practice for investors, especially retirees, to invest in high dividend paying stocks to generate income. While there is some merit with this strategy, I could argue the opposite. It has often been a good strategy to be a long-term holder of banking stocks to collect dividends but over the past five years banks have been falling heavily. Another example is Telstra, which has fallen over 60 percent for almost a decade although it has been rising over the last couple of years.

When a stock falls heavily its dividend yield increases, which makes it attractive to investors. But the question you have to ask yourself, is it smart to invest in a company that is falling in value? Think about it, why would you invest in a stock to receive a 5 per cent dividend yield when the price of the stock is falling significantly more than the dividend you would receive? It just doesn’t make sense.

If we look at three of the big 4 banks including ANZ, NAB and WBC, the fall from their 2015 highs is well over 50 per cent, while CBA is down over 30 per cent. In March of this year, they all fell further in price with the corona virus crash, and their dividend yields have risen as a result. ANZ, NAB and WBC were all paying a dividend yield over 9 per cent while CBA was paying a yield of over 6 per cent.

Now here is the kicker: investors want certainty, and when they see a high dividend yield they expect they will receive this year in and year out but unfortunately, this is a false assumption. When the share price is falling, this often means that the earnings of the company are also falling. Consequently, the dividend payout will often be reduced or cut altogether.

In the current market conditions, we know that banking dividends are not only in jeopardy of being reduced but in some cases they are in danger of being cancelled altogether. So this begs the question, does the practice of dividend investing still have a place in your investment strategy. In my opinion, it is far better to make the decision to invest in stocks that are rising first rather than simply looking at the dividend yield.

What were the best and worst performing sectors last week?

While all of the sectors in the Australian stock market traded down last week, things were not as bad as you might think. Utilities was the top performer down 1.6 per cent followed by Materials down 2.5 per cent and Energy down 3.69 per cent. The worst sectors included Industrials down over 7 per cent, Consumer discretionary down over 5 per cent and Healthcare down just under 5 per cent.

While all those negative figures sound bad, the down move was orderly rather than driven by panic, which is a good sign.

Looking at the ASX top 100 stocks, Evolution Mining topped the list, as it was up over 9 per cent followed by Northern Star Resources, which was up over 4 per cent. Crown Resorts, Ausnet and JB Hi-Fi were also up around 2 per cent last week. The worst performers included Challenger down over 15 per cent, while Lend Lease, Reliance Worldwide, Virgin Money and Flight Centre were all down over 13 per cent.

What's next for the Australian share market?

For the first three days of last week the Australian stock market was down around 7 per cent at one stage before finding support and rising. In my previous report, I mentioned that the market was indecisive and showing signs of weakness, which has been confirmed by the down move last week. Right now, it is a very interesting time in our market, as what unfolds next will signal what we can expect over the coming month or more. If the All Ordinaries Index can stay above 5,000 points over the next week or so and start to rise, then it is more likely we will experience a more sustained rise over the next month to six weeks.

That said, we still need to be mindful that we may not have seen the end of the current stock market crash; therefore, I cannot discount that the market may fall below the low of 4,429 points set back on 23 March. So, while the market is looking a little more positive, we are not out of the woods yet and it will only take some bad news for another wave of heavy selling to occur, which is why I continue to encourage you to be patient until the dust settles.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores.