| Many people buy stocks for their dividends which is a | | | | not feel comfortable with the old CEO and his |
| pretty sound strategy for Self Managed Super Funds | | | | management team. Though it is still early days, I do |
| (SMSFs), especially if your plan is for your super fund | | | | like what I have read and heard about the new |
| to provide you with income when you are retired. In | | | | Telstra CEO. A stock valuation service I use also |
| the Australian market, bank stocks were a favourite | | | | valued the stock at $3.09 so I am comfortable |
| among dividend seeking investors. Many financial | | | | buying the stock at $3.00 or less. |
| planners were advocating buying bank stocks in late | | | | In June 2009, I decided to sell some Telstra Aug09 |
| 2008 because they were generating dividend yields | | | | $3.12 put options for a premium of $0.20. If Telstra's |
| of close to 10%. The only problem with this advice | | | | stock price is less that $3.12 on 27 August 2009 |
| was that dividends are not guaranteed and is usually | | | | when the options expire, I will have to buy the stock |
| a percentage of earnings. If earnings fall, dividends | | | | at $3.12 but the net cost to me would be $2.92 (3.12 |
| would typically fall as well so buying a stock simply | | | | - 0.20) which is a price I am happy to pay for this |
| because the dividend yield (based on historical | | | | stock. If Telstra's dividends stay the same, I will have |
| dividends) looks attractive is not really a good idea. | | | | a return of 10% on my money which is better than |
| This certainly has proven true for bank stocks as | | | | current interest rates. However, I am not counting on |
| banks have since cut dividends as earnings fell and | | | | Telstra to maintain this level of dividends even |
| they have also had to retain more of the earnings to | | | | though they have done so in the past two years. As |
| provide for potential bad debts. | | | | Telstra is an optionable stock, I can very easily sell |
| For me, I prefer to generate my own "dividends" | | | | call options to get this 10% income even if Telstra |
| rather than rely on the company to provide me with | | | | pays no dividends at all that year. My current plan is |
| the dividends I want. Firstly, I would look for stocks | | | | sell call options to generate 10% income and |
| in sectors that are relatively recession proof like | | | | assuming Telstra continues to pay the 28 cents of |
| consumer staples, utilities or telcos rather than | | | | fully franked dividends, I could get a total return of |
| finance. With banks, we still don't know the how | | | | 20% or more annually. |
| many more loans will become bad due to escalating | | | | I am also pursuing this strategy with a few other |
| unemployment and business failures, or how many | | | | recession proof stocks like Woolworth and CSL, |
| more new capital raising they will need to do which | | | | which are optionable. My outlook for the Australian |
| will dilute existing shareholders. One stock I have | | | | economy for the next year is for low or no growth. |
| been watching for a while is Telstra (TLS), Australia's | | | | Hopefully, the worst is behind us but even then, I |
| largest telecommunications company. When stock | | | | expect company earnings, even of the recession |
| was trading in the $3 - $3.30 range, the dividend yield | | | | proof companies, to be stagnant so I do not expect |
| is around 8-9%. As this dividend is fully franked i.e. | | | | much in terms of capital gains for these stocks. |
| already taxed at 30%, the yield is easily over 10% | | | | Capital gains would be a bonus but I am banking on |
| for SMSFs who only need to pay tax of 15% instead | | | | getting my returns from both company dividends as |
| of 30%. Although I like the Telco industry, I have | | | | well as the dividends I generate myself from selling |
| been hesitant to buy Telstra before because I did | | | | options over these stocks. |