Why you should aim for the return, not the income


It is common for investors to blindly follow the herd, which often means they are more focused on receiving income rather than capital growth they could gain from buying stocks.

However, smart investors know that investing is not just about income, it's about the total return because chasing 7% for income while the stock is falling 20% or more simply doesn't make sense.

Many times, investors give up much more in capital than they gain in income and Telstra is a perfect example of this.

telstra shares investing aim for the return not the income

It fell 72% over nearly 12 years between 1999 and 2010 and after rising over four years, it fell 61% between 2015 and 2018. During this time, investors held the stock for the dividend income, yet many long term investors would be lucky if they were in profit, especially when you factor in inflation.

Investors are often encouraged to hold real estate stocks and REITS long-term, so as to receive dividends which has not been a wise strategy this year. A study of 45 of these stocks shows that 40 have averaged a loss of 20% since January 1.

The average dividend yield on property stocks is just over 4%, so investors are really going backwards by holding these stocks.

With the current challenges around commercial property caused by COVID and employees preferring to work from home more, I suspect we may not have seen an end to the downfall in real estate stocks and REITS.

While I am not suggesting this will continue over the long term like Telstra and fall for ten or more years, investors need to be mindful they are investing to make a profit.

Regardless of the stock prices direction, we also need to remember that a company can reduce or suspend dividends at any time, which they did during the COVID meltdown.

You also need to remember that the more the price of a stock falls the higher the dividend yield, which is often used to tempt investors into buying and holding these stocks in an attempt to suspend the falling share price.

Given this, it's wise to understand that a high dividend yield may not always be the opportunity you think because you could just be catching a falling knife. First and foremost, investors should focus on stocks that will rise in value before considering any dividend yield.

The best and worst performing sectors this week

The best performing sectors include Energy up more than 2% followed by Financials, which is just in the green while Utilities is just in the red so far for the week.

The worst performing sectors include Healthcare down more than 3% followed by Information Technology and Consumer Staples, which are both down more than 2%.

The best performers in the S&P/ASX top 100 stocks include AMP up more than 5% followed by Pilbara Minerals up more than 4% and the Star Entertainment Group up more than 3%.

The worst performing stocks include Ramsay Healthcare down more than 10% followed by Lynas Rare Earths and Evolution Mining, which are both down more than 6%

What's next for the Australian stock market

What an interesting week it has been for the All Ordinaries Index given that earlier in the week it continued to rise before falling 2.5% on Wednesday following the news that the Dow Jones had fallen nearly 4% the night before.

When events like this occur, it is interesting to watch the knee-jerk reaction by investors making emotional decisions because they probably don't understand that the only ones profiting from this is the big end of town.

Right now, it is still possible that the market has not stopped falling, which is why I mentioned last week that investors should wait for confirmation before buying and the events that transpired this week has not changed my opinion.

If the Australian stock market rises on Friday, it may be a sign that dip this week was just an overreaction to the Dow falling.

If the market has bottomed, as I suspect it has, we will see it move up over the next month or so to erode most of the losses experienced this year. If the market moves up next week, then the probability of this occurring increases dramatically.

For now it is still wise to sit tight until we can confirm the direction of the market.

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Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.