Last week saw a large number of broker notes hitting the wires once again. Three buy ratings that caught my eye are summarised below.

Here’s why brokers think investors ought to buy them next week:

BHP Group Ltd (ASX: BHP)

According to a note out of Goldman Sachs, its analysts have retained their buy rating and lifted their price target on this mining giant’s shares to $37.80. The broker lifted its price target to reflect higher than expected iron ore prices. In addition to this, it notes that BHP has a strong balance sheet and could use this for share buybacks or value-accretive acquisitions. It also likes the miner due to its strong free cash flow generation and high returning green/brownfield projects. I agree with Goldman Sachs and would be a buyer of its shares.

National Australia Bank Ltd (ASX: NAB)

Analysts at UBS have upgraded this banking giant’s shares to a buy rating with an improved price target of $20.50. According to the note, the broker believes that the outlook for the banks is not as bleak as it looked just a few weeks ago. In light of this, it sees value in NAB’s shares after they underperformed the market during the crisis. I agree with UBS and think NAB and the rest of the big four banks look good value at present.

Qantas Airways Limited (ASX: QAN)

A note out of Morgan Stanley reveals that its analysts have retained their overweight rating and $5.20 price target on this airline operator’s shares. This follows an announcement by Qantas that its domestic capacity could be back to upwards of 40% of pre-pandemic levels by the end of July. It also notes that there is speculation that international travel between Australia and New Zealand could commence from next month. This would be a positive. As long as there is no second wave, I think Qantas could be a good option for investors.

More reading

• Top brokers name 3 ASX 200 shares to sell next week
• How mum and dad investors are beating fund managers at their own game
• Why dividend shares aren’t quite as good as you’d think
• Is this ASX small cap the best placed to benefit from the $700m HomeBuilder grant?
• Invest like Warren Buffett with these ASX 200 shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Top brokers name 3 ASX 200 shares to buy next week appeared first on Motley Fool Australia.

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Retails investors can give themselves a pat on their back as they are outperforming most fund managers in the COVID-19 rebound!

The S&P/ASX 200 Index (Index:^AXJO) made a stellar 32% bounce since the bear market trough 11 weeks ago and most of the gains were reaped by everyday investors.

It’s the so-called “smart money” that have been playing catch-up as they were bracing for a second sell-off that never came.

Right warning, wrong timing

Remember back in early May when ASIC issued an usual warning to mum and dad investors? The market regulator was alarmed to see a spike in new and dormant trading accounts springing up and cautioned them about the likelihood of losing money.

“Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge,” said ASIC.

“For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families.”

Lion’s share of the gains

This is very sound advice and there may be some retail investors who have lost big during the market turmoil.

But there’s little doubt it’s retail investors that have been backing the V-shape recovery in our market while fund managers sat on their hands.

I don’t have the data to prove this, but there is enough anecdotal evidence to suggest this is true – and it isn’t only happening here.

US retail investors are laughing too

Retail investors in the US have also been jumping head first into the market. Bloomberg reported that retail brokerages, including Charles Schwab Corp. and TD Ameritrade Holding Corp., posted record account sign-ups and trading volume.

All this while the S&P 500 was surging over 40% from its bear market bottom in on March 23.

Call it dumb luck, but retail investors here and in the US couldn’t have timed their entry any better!

Buying the bottoms and selling the tops

I have been actively buying the market since speculating at the end of March that we may have seen the worst of the sell-off.

But the purpose of this article isn’t self-congratulatory. There are a few important takeaways from this experience.

For one, ASIC is right to warn investors not to try to time the market – and this probably applies to fund managers too.

The right strategy for those with a longer investment horizon is to stay invested in the market and to buy when you believe there is value, as opposed to worrying about whether there’s another shoe that will drop.

No one can consistently buy the bottom and sell the tops. Making this your ultimate goal will drive you crazy.

Should you be day trading?

Unless you know what you are doing, trading in and out of the market will often leave you nursing losses as over 80% of short-term and day traders get wiped out in the first two years of starting.

For those first timers who are lucky enough to make a killing in this new bull market, they should get educated about the market quick. Pay to attend courses and read up on managing risks. Avoid the free seminars as there’s usually a reason why they are free.

Most of all, don’t over extend yourself. You know you are in this camp if you can’t pay your bills or feed yourself if the market suddenly turns.

Tips for dips

Finally, don’t be afraid to buy the dips. The fact that many fund managers have been slow to buy into this new bull market means there’s a lot of cash sitting on the sidelines waiting for opportunities.

This doesn’t mean we won’t get a market correction of up to 10%, but after such a big jump, we are very unlikely to be retesting our March 23 lows.

More reading

• Top brokers name 3 ASX 200 shares to sell next week
• Top brokers name 3 ASX 200 shares to buy next week
• Why dividend shares aren’t quite as good as you’d think
• Is this ASX small cap the best placed to benefit from the $700m HomeBuilder grant?
• Invest like Warren Buffett with these ASX 200 shares

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Follow me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post How mum and dad investors are beating fund managers at their own game appeared first on Motley Fool Australia.

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I think it’s fairly safe to say that most ASX investors love a good dividend share, particularly those that offer franking credits. The unique way our tax system is structured makes it very attractive for ASX shares to pay dividends to investors. Over time, this has led to most ASX companies adopting a dividend payout policy, even if they’re still very much in their ‘growth phase’.

We can see this reflected in the yields that an S&P/ASX 200 Index (ASX: XJO) fund provides. Let’s take the iShares Core S&P/ASX 200 ETF (ASX: IOZ). It has a trailing yield of 4.51% on current prices, which also comes with some franking credits.

By comparison, a US-based index fund like the iShares S&P 500 ETF (ASX: IVV) currently offers a trailing dividend yield of just 1.94%, with no franking credits in tow.

No brainer, right?

Well, maybe.

What’s wrong with ASX dividend shares?

Dividends are great – I love them myself. But perhaps dividend income isn’t quite as good as it initially seems.

Let’s look at 2 hypothetical companies.

Company A and Company B both make $1 in earnings per share. That’s $1 a shareholder of both Company A and Company B is entitled to as a part owner.

But let’s say both companies can achieve an internal Return on Invested Capital (ROIC) of 15%.

If company A retains its earnings and reinvests that $1 back into the company, it should be able to provide $1.15 of earnings per share in the following year. Since it is reinvesting this money, it’s not subject to corporate taxes. As such, shareholders of Company A get the benefit of an untaxed profit of 15 cents per share that is now compounding and working to create even more wealth in the future.

The real cost of a dividend

By Contrast, Company B instead pays out half of its earnings as a dividend of 50 cents per share. It then reinvests the remaining 50 cents per share back into the business. Thus, Company B owners are getting 50 cents per share in dividend income and can expect 57.5 cents in earnings per share the following year.

But given that 50 cents per share is being paid out of profits, this money must first be subjected to corporate tax. Afterward, the dividends will come with a receipt that tax has been paid, commonly known as a franking credit. This franking credit enables the dividend not to be taxed again as income when received by its shareholders.

But it is still taxed money, even if only taxed once. The point here is that Company A shareholders can expect  $1.15 in earnings the following year, on which no tax is payable. Company B shareholders can expect $1.075 in earnings the following year, half of which will be taxed.

Over time, this gap in earnings power will widen, making one group of shareholders a lot wealthier than the other. And all because Company B is paying out half its profits while Company A is reinvesting them.

Sure, Company B shareholders are getting some income on the side, but this income is coming at a cost. Unless you can reinvest your dividends for a return greater than 15% per annum, you’re losing out.

Foolish takeaway

Everything comes at a price, and dividend income is no different. So if you’re swooning over how great dividend shares are, have a think about what your company might be giving up to fund paying you these dividends. Or find companies that can manage both growth and funding a dividend.

More reading

• Top brokers name 3 ASX 200 shares to sell next week
• Top brokers name 3 ASX 200 shares to buy next week
• How mum and dad investors are beating fund managers at their own game
• Is this ASX small cap the best placed to benefit from the $700m HomeBuilder grant?
• Invest like Warren Buffett with these ASX 200 shares

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Why dividend shares aren’t quite as good as you’d think appeared first on Motley Fool Australia.

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