Buying Shares - better than cash at the moment - Financial Advice
Shares for a better rate than cash
After my piece on "whether cash is the best place at the moment" I received some
emails saying that the market could go down further and therefore cash would be
the best place. I certainly won't predict the market movements but one thing we
do know for sure is that interest rates have to come down, hence cash rates must
come down. I do think with all the current discussion it is very likely that
cash rates will be around 3% by March 2009.
Let's look at some of the market movements this week, using BHP as an example. BHP rose 11% in one day, which is 2 times the amount you will get for cash per annum in one day. My point is that the market will continue to be volatile and the recovery will not be quick (as they say the market goes up by the stairs and down in the elevator), and cash may be fine for a week or 2 weeks but for a 12 month outlook shares and managed funds are the best bet.
Let's consider Telstra for a moment. This is a stock I love to hate and probably for the same reason many of you hate it: they have terrible service, and it is an inefficient lumbering giant with no consideration for its customers. Leaving emotion aside, which as we all know is what a true investor must do (so we all tell ourselves as we sweat and lose sleep through these volatile times!), so leaving emotion aside let's look at Telstra's dividends.
As it is awash with our cash, Telstra pays around 5-6% as a franked dividend. Franked dividends are great because it means Telstra has already paid tax on the dividend so depending on your tax bracket it's possible you won't have any more to pay (it will effectively be 'tax free' to you). With cash, on the other hand, you have to pay tax on the interest earned at your marginal rate.
Banking stocks are similar to this, and although they have been punished severely they still pay dividends that are better than the cash rate.
In addition, you're never going to get any capital growth on cash because all you're earning is the interest rate. But with shares, on the other hand, you not only receive dividends that are better than the cash rate but you also have a chance of some growth.
As Telstra sits today the share price is $4.20; in 12 months time if the price is $4.60 that will be a 10% gain. So a franked dividend of 5% tax free and a growth rate of 10%: that's so much better than the cash rate. Telstra has only fluctuated from $3.90-$4.90 over the past year so has experienced less volatility than say banking stocks.
So the big question is: do we think these stocks will increase by 10% over the next 12 months? We certainly hope so but if not, their dividends are better than any cash rate you can get at the moment or the foreseeable future.
Even in this once in a lifetime catastrophe the best way forward is quality equities.
Let's look at some of the market movements this week, using BHP as an example. BHP rose 11% in one day, which is 2 times the amount you will get for cash per annum in one day. My point is that the market will continue to be volatile and the recovery will not be quick (as they say the market goes up by the stairs and down in the elevator), and cash may be fine for a week or 2 weeks but for a 12 month outlook shares and managed funds are the best bet.
Let's consider Telstra for a moment. This is a stock I love to hate and probably for the same reason many of you hate it: they have terrible service, and it is an inefficient lumbering giant with no consideration for its customers. Leaving emotion aside, which as we all know is what a true investor must do (so we all tell ourselves as we sweat and lose sleep through these volatile times!), so leaving emotion aside let's look at Telstra's dividends.
As it is awash with our cash, Telstra pays around 5-6% as a franked dividend. Franked dividends are great because it means Telstra has already paid tax on the dividend so depending on your tax bracket it's possible you won't have any more to pay (it will effectively be 'tax free' to you). With cash, on the other hand, you have to pay tax on the interest earned at your marginal rate.
Banking stocks are similar to this, and although they have been punished severely they still pay dividends that are better than the cash rate.
In addition, you're never going to get any capital growth on cash because all you're earning is the interest rate. But with shares, on the other hand, you not only receive dividends that are better than the cash rate but you also have a chance of some growth.
As Telstra sits today the share price is $4.20; in 12 months time if the price is $4.60 that will be a 10% gain. So a franked dividend of 5% tax free and a growth rate of 10%: that's so much better than the cash rate. Telstra has only fluctuated from $3.90-$4.90 over the past year so has experienced less volatility than say banking stocks.
So the big question is: do we think these stocks will increase by 10% over the next 12 months? We certainly hope so but if not, their dividends are better than any cash rate you can get at the moment or the foreseeable future.
Even in this once in a lifetime catastrophe the best way forward is quality equities.
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Margin Lending | Stock Trading | Stock Market Crash | Tips | Quotes | Property Boom | Baby Boomers | Mortgage Trust
Reduce Tax | Buying Shares | How To Invest | Investment Scams | End Of Financial Year | Building Wealth
Oulook 2006 | Investment Types | Property Trust | Market Investment