Opportunity can arise when companies cut dividends
Australian household debt as a percentage of household disposable income has more than doubled in the past decade reaching all time high’s, whilst the cash rate has more than halved to all time low’s during the same period. Even if there is another interest rate cut, it is clear that we are on the low end relative to history. Many investors have been sucked into the trap of looking for income above cash deposit rates in popular ‘blue chip’ or seemingly ‘safe’ companies such as banks, utilities and some property trusts. Unfortunately, the dividend yields of many of these leveraged companies may not be sustainable at higher interest rates, meaning those investors could face the prospect of real capital losses in the future.
We are heavily focused on capital preservation and concentrate largely on the underperforming companies and sectors, along with smaller companies that are under the radar of large institutional funds. In fact, over the past few years we have found some fantastic investments in companies after they cut their dividend. Investors who previously owned the stock for its income often sell out completely, depressing the share price to a point where we see an attractive investment opportunity over the medium term. Once business performance improves, dividends are reinstated, meaning these companies deliver both capital gains and income over time.
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