Tag: Motley Fool

The availability of low cost brokerage and market volatility during the pandemic appears to have led to a surge in day trading activity from investors around the globe.

This is certainly evident on social media platforms, particularly on Facebook in stock tipping groups.

While it is certainly true that you can make money trading shares, it is worth remembering that statistically it creates far more losers than winners.

What should you do?

As tempting as it is to trade shares, I believe the best way to build your wealth is to invest with a long term view. By buying and holding quality ASX shares, investors can take advantage of compounding.

But which shares should you buy and hold? Three top options that I would buy with a long term view are listed below. Here’s why I think they are quality options:

Appen Ltd (ASX: APX)

Appen is a leading developer of high-quality, human annotated datasets for the machine learning and artificial intelligence markets. These markets are expected to grow materially in the future, which can only be a good thing for Appen. Approximately 10% of spending in these markets is estimated to be made on the data labelling that it is an industry leader in. In light of this, I expect demand for its services to continue to grow in the coming years. This should support strong earnings growth over the 2020s.

Cochlear Limited (ASX: COH)

Cochlear is a global developer, manufacturer, and distributor of cochlear implantable devices for the hearing impaired. I think it would be a great long term option due to the ageing populations tailwind. This is because as people age, their hearing will more often than not require some form of assistance. So, with the World Health Organization estimating that there will be almost three times more people over the age of 65 by 2050 than there were in 2010, demand for Cochlear’s industry-leading cochlear implantable devices looks likely to grow strongly over the next few decades.

Kogan.com Ltd (ASX: KGN)

A final option to consider buying is Kogan. It is Australia’s leading ecommerce company and our homegrown answer to Amazon. I think it would be a top option due to the ongoing shift to online shopping and its increasingly popular website. As of last year, just 10% of shopping was made online. I expect this percentage to grow materially over the next decade, particularly given the pandemic’s impact on consumer behaviour. Combined with potential earnings accretive acquisitions, I believe this positions Kogan well for long term growth.

More reading

• 5 things to watch on the ASX 200 next week
• 3 five-star ASX stocks to buy right now
• Insiders have been buying Cochlear (ASX:COH) and this ASX share
• Where to invest your JB Hi-Fi (ASX:JBH) dividends today
• 2 ASX shares I would buy again and one I regret

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and Kogan.com ltd. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and Kogan.com ltd. 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.

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A lot has been made recently about the high prices of many shares – both on the ASX and around the world. Like, a lot. ASX share market news has been dominated in recent months by stories like that of Afterpay Ltd (ASX: APT), up more than 700% since 23 March. Or Sezzle Inc. (ASX: SZL), up more than 1,500% over the same period.

Even the blue chip shares some investors decry as ‘boring’ haven’t disappointed. Fortescue Metals Group Limited (ASX: FMG) shares, for instance, have risen more than 60% this year so far.

2020 was supposed to be a year of extreme uncertainly for global share markets. At least that’s what we all thought back in March. But in reality, we saw one of the shortest bear markets in history, and it’s been ‘back to the races’ ever since. But how is this possible? The coronavirus pandemic has wreaked global economic damage of the once-in-a-hundred-years kind. We are seeing unprecedented GDP numbers right around the world. Australia’s fell 7% (the largest quarterly drop on record) for the quarter ending 30 June 2020. Unemployment is forecast to rise above 10% by the end of the year. And yet we have seen a rampaging share market for most of 2020.

Over in the United States (which has arguably been hit a lot harder than Australia), we saw all-time record highs for markets as recently as last week.

Why are markets so high in the coronavirus age?

Well, there’s only one explanation, in my view. See, the share price that the market comes up with at any given time for any particular company can be explained by the price-to-earnings (P/E) ratio. This takes a company’s earnings per share (EPS), or how much money it makes, divided by the number of shares outstanding, and divides it by the company’s share price.

This means that the only two variables that influence a share price are how much earnings the company makes (which is a universal metric seeing as a dollar is worth the same across the economy), and how much investors are willing to pay for those earnings. Take the current Woolworths Group Ltd (ASX: WOW) share price. The company recently reported EPS of 92.7 cents. That gives Woolworths a P/E ratio of approximately 39.60 on recent pricing.

Now, if an investor decides to bid $41 per share for Woolworths tomorrow, they are effectively upping the P/E ratio of Woolworths shares, given that the earnings (or E) haven’t changed.

And because markets have exploded higher in 2020 in what has been a mixed bag (at best) of earnings in 2020, we can only assume that investors have suddenly decided to value shares across the board at higher rates, a view confirmed by The Wall Street Journal. According to the WSJ, exactly a year ago, investors were paying an average P/E of 22.95 for S&P 500 shares (the flagship US index). Today, it’s 37.92. My Fool colleague, James Mickleboro, explored this concept in-depth a few days ago.

Are high P/E ratios here to stay?

I think they might be, but that isn’t comforting. Historically, a market-wide high P/E ratio signals danger around the corner. But with interest rates virtually at zero around the world, there isn’t much that can pull these valuations down in a permanent sense. Once interest rates start rising again? Well, that’s a different story. So make sure you have absolute faith in the companies in your portfolio, because the market won’t be kind to everyone forever!

More reading

• 3 top ASX dividend shares I would buy next week
• 5 things to watch on the ASX 200 next week
• Buy these ASX growth shares after the market selloff
• 3 exotic ASX tech ETFs you might want to add to your portfolio today
• Why the Afterpay (ASX:APT) and Sezzle (ASX:SZL) share prices are falling again today

Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T FPO and Woolworths Limited. The Motley Fool Australia has recommended Sezzle Inc. 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.

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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:

IDP Education Ltd (ASX: IEL)

According to a note out of Goldman Sachs, its analysts have retained their buy rating and lifted the price target on this student placement and language testing company’s shares by almost a third to $22.50. Goldman believes IDP Education is well positioned for the eventual restart of the international student market. And looking further ahead, its analysts note that it is exposed to long dated structural tailwinds in international education and well placed to increase its market share in the fragmented student placement market. I agree with Goldman Sachs and would be a buyer of IDP Education’s shares.

Nearmap Ltd (ASX: NEA)

A note out of the Macquarie equities desk reveals that its analysts have retained their outperform rating and lifted the price target on this aerial imagery technology and location data company’s shares to $3.20. Its analysts appear pleased with its capital raising and expect it to support its future growth in the key United States market. In light of this, it has upgraded its annualised contract value estimates for the coming years. I think Macquarie is spot on and Nearmap could be a great long term option for investors.

Westpac Banking Corp (ASX: WBC)

Another note out of Goldman Sachs reveals that its analysts have retained their buy rating and $19.83 price target on this banking giant’s shares. The broker notes that APRA has released additional data on loan repayment deferrals. This data reflects very positively on Westpac and appears to show that just 7% of its loan book is on deferral at present. In addition, of the big four banks, Westpac has seen the biggest net improvement in mortgage deferrals. I would have to agree with Goldman Sachs on this one too. I think Westpac is trading at a very attractive level at present.

More reading

• These were the worst performing ASX 200 shares last week
• ASX 200 drops 0.8%, Nearmap (ASX:NEA) sinks
• Leading broker downgrades Nearmap (ASX:NEA) shares
• ASX 200 down 0.95%: Rio Tinto (ASX:RIO) CEO exits, Nearmap (ASX:NEA) sinks lower
• Why BrainChip, Evolution, Nearmap, & Zip shares are tumbling lower

James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Idp Education Pty Ltd and Nearmap Ltd. The Motley Fool Australia has recommended Nearmap Ltd. 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.

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If you’re a investor just starting your portfolio I think there are a number of ASX shares that could be good ideas.

I wouldn’t want one of your first investments to blow up in your face. That could put you off ASX shares, which would be very disappointing because I think shares are the best long-term wealth creation tool out there.

Here are three good investments that would be really good as long-term wealth building ideas for beginner investors:

WAM Microcap Limited (ASX: WMI)

WAM Microcap is a listed investment company (LIC) which invests in small ASX shares. It targets ones with a market capitalisation under $300 million. These smaller businesses can be very exciting growth ideas.

The investment team have proven to be very good investors. WAM Microcap reports its investment returns before expenses fees and taxes. Over the past three months its gross return was 26.9%, over the past year (including the COVID-19 crash) its gross return was 25.4% and since inception in June 2017 it has returned 21.7% per annum.

Since inception in June 2017, its gross performance outperformed the S&P/ASX Small Ordinaries Accumulation Index by 13.3% per annum.

It invests in exciting businesses like People Infrastructure Ltd (ASX: PPE), Citadel Group Ltd (ASX: CGL, Redbubble Ltd (ASX: RBL) and Selfwealth Ltd (ASX: SWF). It offers good diversification as it owns dozens of smaller ASX shares. 

As a bonus, WAM Microcap is steadily increasing its ordinary dividend and it regularly pays a special dividend.

At the current WAM Microcap share price it’s trading at a slight discount to the August 2020 net tangible assets (NTA) per share. That you means you can buy a basket of ASX shares worth $1.49 per share for $1.46 per share.

Betashares Global Sustainability Leaders ETF (ASX: ETHI)

New investors may want to only invest in businesses that are doing good in the world. Or at least aren’t causing negative effects on the world.

This is an exchange-traded fund (ETF) which owns a portfolio of businesses that have been identified as climate leaders that have also passed screens to exclude companies with direct or significant exposure to fossil fuels or engaged in activities deemed inconsistent with responsible investing considerations.

In practice, that means excluding businesses with exposure to gambling, tobacco, armaments, alcohol, junk foods, pornography, the destruction of valuable environments, human rights and supply chain concerns and so on.

The Betashares Global Sustainability Leaders ETF has actually performed very well. Investing ‘ethically’ doesn’t have to come at the expense of returns. Over the past year it has returned 27.8%, over the past three years it has returned 23.5% per annum and since inception in January 2017 it has returned 21.6% per annum.

It’s invested in lots of great businesses like Apple, Nvidia, Mastercard, Visa, Home Depot, Adobe and PayPal. It doesn’t invest in ASX shares, as the ‘global’ name may suggest.

Its annual management fee is just 0.59% per annum, which is very cheap for an ethical option.

This is the type of investment you could own as your only investment because of its performance and global diversification. It’s invested in around 200 businesses.

A2 Milk Company Ltd (ASX: A2M)

If you want to invest in an ASX share with plenty of growth potential then I think A2 Milk is a great option today.

In the FY20 result, A2 Milk grew revenue by 32.8% to NZ$1.73 billion and net profit after tax (NPAT) rose by 34.1% to NZ$385.8 million.

There are two reasons why I think A2 Milk is a really good buy today. It continues to grow its distribution and market share in the US and China. Those are two huge markets that could support a much bigger A2 Milk business.

The other reason is that the A2 Milk share price has fallen by 16% since 18 August 2020. It’s trading at a more attractive valuation, it’s priced at 24x FY23’s estimated earnings.

Foolish takeaway

I believe each of these ASX shares would be good picks to start a portfolio with. WAM Microcap is a really good option for dividend income, but Betashares Global Sustainability Leaders ETF offers attractive global diversification with (historically) good returns as well.

More reading

• Where to invest $10,000 into ASX shares today
• 3 small cap ASX shares I’d buy with $3,000 right now
• Top brokers name 3 ASX shares to sell today
• Interested in ethical investing? Look at these 3 ETFs
• Why you shouldn’t be concerned by the high PE multiples of ASX tech shares

Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Citadel Group Ltd and People Infrastructure Ltd. 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.

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If you’re looking for ways to beat low interest rates, then I think the share market is the answer.

This is because there are a large number of quality companies on the ASX sharing their profits with investors in the form of dividends.

Three ASX dividend shares I would buy next week are listed below. Here’s why I would invest in them:

BWP Trust (ASX: BWP)

The first dividend share to look at is BWP Trust. It is a real estate investment trust which has close ties with Wesfarmers Ltd (ASX: WES). As well as having the majority of its warehouses leased to Wesfarmers’ Bunnings Warehouse business, the conglomerate is a major BWP shareholder. I see this is a positive and feel it means Wesfarmers is unlikely to do anything that would have a negative impact on BWP’s performance and ultimately its investment. All in all, I believe it leaves the company well-placed to deliver consistent rental income and distribution growth for many years to come. Based on the current BWP share price, I estimate that it offers investors a forward 4.6% yield.

Fortescue Metals Group Limited (ASX: FMG)

Another dividend share to consider buying is Fortescue Metals. If you’re not averse to investing in the resources sector, then I think it could be a top option for income investors. This is due to the sky high iron ore price and the strong free cash flow it is underpinning. Given the strength of its balance sheet and its favourable dividend policy, I expect the majority of this cash to be returned to shareholders through dividends. Based on the current Fortescue share price, I estimate that it offers a forward fully franked dividend of at least ~6%.

Lendlease Group (ASX: LLC)

A final ASX dividend share to consider buying is Lendlease. I think the international property and infrastructure company could be a great option for investors. With the worst now behind the company and management recently announcing a new strategy, I believe it is well-positioned for growth over the 2020s. Especially given its burgeoning global development pipeline, which includes a huge project with Google. Currently, I estimate that the company will pay a 33 cents per share dividend in FY 2021 before increasing it to 50 cents per share in FY 2022. Based on the current Lendlease share price, this equates to 2.7% and 4.1% dividend yields, respectively.

More reading

• Why retirees should add these solid ASX dividend shares to their portfolios
• A definitive guide to September ASX share trends
• 2 ASX shares I would buy again and one I regret
• Why the Rio Tinto share price is outperforming its peers
• 2 reliable and high quality ASX dividend shares to buy today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. 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.

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Last week was a disappointing one for the S&P/ASX 200 Index (ASX: XJO). After a series of ups and downs, the benchmark index ultimately dropped 66.1 points or 1.1% to end the week at 5,859.4 points.

Another busy week is expected next week. Here are five things to watch on the ASX 200 over the five days:

ASX 200 futures pointing slightly higher.

According to the latest SPI futures, the ASX 200 is poised to start the week in the black. Current futures contracts are pointing to a small 4 point gain at the open on Monday. This follows a reasonably positive night of trade on Wall Street on Friday which saw the Dow Jones rise 0.5%, the S&P 500 edge slightly higher, and the Nasdaq fall 0.6%.

Sydney Airport traffic update.

The Sydney Airport Holdings Pty Ltd (ASX: SYD) share price will be on watch on Friday when it releases its traffic numbers for the month of August. Last month the airport operator revealed that passenger numbers were down 91.8% in July compared to the prior corresponding period. I’m not expecting a major improvement on this in August due to border restrictions.

Tech shares on watch.

September certainly has been a rough month for Australian tech shares. Since the start of the month, the S&P/ASX All Technology Index (ASX: XTX) has lost 9.3% of its value. Heavy declines from the likes of Afterpay Ltd (ASX: APT) and Appen Ltd (ASX: APX) have weighed heavily on the index. Is the tech rout finally over? Judging by the Nasdaq’s 0.6% decline on Friday night, it might not be over just yet. But I’m optimistic it is very close.

Premier Investments results.

Premier Investments Limited (ASX: PMV) hasn’t revealed when exactly it plans to release its full year results, but traditionally it is around this time in September. Investors may want to keep an eye out for an announcement from the Smiggle and Peter Alexander operator late in the week. With the help of Job Keeper, the Premier Retail business is expected to report record full year earnings before interest and tax of between $184.8 million and $185.8 million. All eyes will be on whether the conglomerate uses the government assistance to maintain or even grow its dividend.

Shares going ex-dividend.

Speaking of dividends. Next week another group of shares will be going ex-dividend. On Monday there’s investment platform provider HUB24 Ltd (ASX: HUB) and appliance manufacturer Breville Group Ltd (ASX: BRG). On Tuesday Inghams Group Ltd (ASX: ING) and Service Stream Limited (ASX: SSM) will trade ex-dividend. Then on Wednesday there’s Costa Group Holdings Ltd (ASX: CGC), followed by Seven Group Holdings Ltd (ASX: SVW) on Thursday.

More reading

• Buy these ASX growth shares after the market selloff
• 3 five-star ASX stocks to buy right now
• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• The ASX 200 is still stuck in a rut

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Hub24 Ltd. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and Premier Investments Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Appen Ltd. The Motley Fool Australia has recommended Hub24 Ltd and Service Stream Limited. 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.

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Are you wanting to add a few growth shares to your portfolio? Well now could be a great time to do it.

A number of popular ASX growth shares have pulled back meaningfully from recent highs. I think this could be a buying opportunity for investors next week.

Two ASX growth shares I would buy are listed below:

Afterpay Ltd (ASX: APT)

The first growth share to consider buying is Afterpay. This payments company’s shares are currently trading 23% lower than their 52-week high. This has been driven by weakness in the tech sector and news that PayPal is entering the buy now pay later market with its Pay in 4 product. In respect to the latter, I’m not overly concerned by this news due to its leadership position and its strong brand. I suspect the smaller players are the ones that will suffer most from PayPal’s entry.

In light of this, I think the weakness in the Afterpay share price is a gift for buy and hold investors. This is because I’m confident Afterpay has the potential to grow materially in the future thanks to the increasing popularity of the payment method, its $5 trillion opportunity in the United States, and its global expansion plans.

Pushpay Holdings Group Ltd (ASX: PPH)

Another ASX growth share to buy and hold is Pushpay. The shares of the donor management and engagement platform provider for the faith sector have fallen over 24% from their 52-week high. I think this has created a buying opportunity for long term-focused investors.

Especially given its very positive growth outlook. After smashing its guidance in FY 2020, the company is on course for more strong growth in FY 2021. Management provided guidance for EBITDAF of between US$48 million and US$52 million. This will be a 91.2% to 107% increase, respectively, year on year.

More reading

• 3 personal finance tips to help strong investing
• 3 exotic ASX tech ETFs you might want to add to your portfolio today
• Why the Afterpay (ASX:APT) and Sezzle (ASX:SZL) share prices are falling again today
• Could these exciting small cap tech shares be the next Afterpay (ASX:APT) and Altium (ASX:ALU)?
• Afterpay (ASX:APT) share price facing new competitive pressure

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of PUSHPAY FPO NZX. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended PUSHPAY FPO NZX. 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.

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2020 has been a tough year for ASX dividend shares. The coronavirus pandemic has crimped economic growth and triggered recessions across the world.

We saw many Aussie companies slash dividends in the August earnings season as cash flow dried up. However, despite the challenges, I think ASX dividend shares are still king in 2020.

Why investors are selling ASX dividend shares

Finance theory tells us that dividends are ‘sticky’. All that really means is that companies tend to avoid cutting dividends as much as possible.

A dividend increase signals that management is confident about future cash flow. Given the negative signal that a cut sends to the market about future profitability, boards rarely raise dividends without being quite sure of future output.

However, COVID-19 has changed that as we saw companies across the board slash distributions. That means investors who owned ASX dividend shares for income have sold down their holdings in the hunt for growth.

After all, if income is off the table then maybe capital gains are worth a look.

Why companies like Telstra are still king

I still think ASX dividend shares have a place in a diversified portfolio. Take a company like Telstra Corporation Ltd (ASX: TLS) which has paid consistent dividends for years.

Despite challenges from COVID-19 and the NBN, Telstra maintained its full-year dividend at 16 cents per share.

That’s good news for investors in the current times when solid dividends are hard to come by.

I also subscribe to the ‘bird in the hand” theory, that cash in the form of dividends today is preferred to unknown cash from growth tomorrow.

Of course, not all ASX dividend shares are created equal. I think it pays to be strategic about where you’re hunting for dividends in industries and sectors.

ASX gold shares like St Barbara Ltd (ASX: SBM) have performed strongly this year. That means with some smart picks, investors can still have both capital gains and dividends in 2020.

The other sector that has caught my eye is Consumer Staples. I think companies like Bega Cheese Ltd (ASX: BGA) and Coles Group Ltd (ASX: COL) can deliver strong earnings and pay tasty dividends in the next 12 to 18 months.

Foolish takeaway

The dividend vs growth debate is as old as investing itself. However, I think when times are tough it can be good to have some reliable dividend shares in your portfolio.

More reading

• Where to invest your JB Hi-Fi (ASX:JBH) dividends today
• Is the Telstra (ASX:TLS) dividend sustainable? This analysts thinks it is
• Why I would buy Coles (ASX:COL) and this ASX dividend share
• ASX 200 rises 0.5%, gold miners glitter
• Why I would buy Telstra (ASX:TLS) and this outstanding ASX 50 share

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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.

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The prospect of a second stock market crash has remained relatively high over recent months. Even though investor optimism has improved after the March 2020 lows, a weak global economic outlook may cause sentiment to return to lower levels in the coming months.

While a second sharp decline for stock prices in 2020 would cause paper losses for many investors, it could present a buying opportunity. Through following Warren Buffett’s value investing strategy, you could benefit from it.

A second stock market crash

The prospects for stocks continue to be very uncertain even after the recent rebound from the market crash. For example, coronavirus cases continue to rise on a global basis at a high rate. This could mean that further lockdown measures are required across major economies, which would further disrupt the operating environments for many companies.

Furthermore, rising unemployment and weaker consumer confidence are likely to be experienced in the coming months. Changing business models in response to evolving customer trends may also mean a period of uncertainty that prompts businesses, consumers and investors to become more cautious regarding spending and investment.

Buying opportunities

Warren Buffett has an excellent track record of capitalising on low valuations during a stock market crash. While most investors become fearful when share prices decline, Buffett sees lower stock prices as an opportunity to buy high-quality businesses at discounted valuations.

Part of the reason Buffett takes this view is that he has a long-term view of his portfolio. Its short-term performance does not seem to interest him, as long as there is the opportunity for it to grow over a period of many years. Through being able to look beyond short-term volatility and instead plan for the long term, you can more easily use market movements to your advantage when seeking to build a large portfolio.

Furthermore, Buffett invests in high-quality businesses after a market crash that are likely to not only survive short-term economic challenges, but improve their market position through having a competitive advantage. They are likely to offer less risk, and greater return potential, in the long run due to a unique product, lower cost base or other factors such as a loyal customer base. Such companies may be better able to adapt to changing market conditions, and deliver relatively high profit growth.

Being prepared

Clearly, a second stock market crash in 2020 is not guaranteed. The world economy could experience an improving period that lifts investor sentiment.

However, it may be prudent to prepare for a second market decline through having some cash available to invest. It may help you to view a stock market fall as a buying opportunity, rather than a reason to worry. Through adopting that mentality, you could follow in Buffett’s footsteps and generate market-beating returns in the long run.

More reading

• Why ASX income investors need to consider these dividend ETFs in 2020
• 3 personal finance tips to help strong investing
• Smash low interest rates with these ASX dividend shares
• 3 five-star ASX stocks to buy right now
• These were the best performing ASX 200 shares last week

Motley Fool contributor Peter Stephens 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.

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2020 has been an especially tough year for ASX dividend income investors. The conventional dividend wisdom of the ASX that has lasted decades has seen its end in 2020. The ASX banks being the kings of the ASX fully franked dividend? No longer. Buying Sydney Airport Holdings Pty Ltd (ASX: SYD) or Transurban Group (ASX: TCL) for ‘safe’ cash flow? Not anymore.

The earnings reporting season we’ve just gone through was a bit like a game of cat and mouse when it comes to dividends. Some companies cut theirs, others kept them steady and some even increased them. But for a dividend investor with what used to be considered a diversified income portfolio, I’m sure it was an anxious wait. Surely there’s a better way of receiving dividend income that sticking with a bunch of companies you hope will be able to continue to give out cash flow each year. That’s a recipe for a very anxious earnings season in FY2021.

Luckily, I think there’s another way to deal with the dearth of dividends that 2020 has brought. And it’s using exchange-traded funds (ETFs).

How does a dividend ETF work?

Like all ETFs, a dividend-focused ETF will hold a basket of ASX shares within the single fund. However, unlike a pure index fund like the Vanguard Australian Shares Index (ASX: VAS), a dividend-focused ETF will only hold companies that fit its income criteria. That usually starts with the presence of the dividend itself and might include other factors, such as franking credits offered or how sustainable the dividend is.

That’s all well and good, but why is this an especially piquant idea for 2020?

Well, an ETF can adjust its underlying holdings every quarter without you as the owner required to exert any time and effort.

Take 2 income-focused ETFs – the Vanguard Australian Shares High Yield ETF (ASX: VHY) and the iShares S&P/ASX Dividend Opportunities ETF (ASX: IHD).

Backtrack a couple of years and both of these funds probably would have had the big four ASX banks as their top holdings. But seeing as bank dividends have more or less dried up in 2020, you’ll instead find the likes of BHP Group Ltd (ASX: BHP) and Wesfarmers Ltd (ASX: WES) dominating VHY and Woolworths Group Ltd (ASX: WOW) and Macquarie Group Ltd (ASX: MQG) at the top of IHDs holdings.

If these companies (hypothetically) happen to tell investors they won’t be paying a dividend in FY21, you’ll probably find companies like Telstra Corporation Ltd (ASX: TLS) and Rio Tinto Limited (ASX: RIO) taking their place before too long. And again, without you as the beneficial owner having to expend time or labour. 

Foolish takeaway

As such, I think all ASX dividend income-focused investors should at least consider adding an income fund like VHY or IHD to their portfolios in 2020. There are so many variables impacting the level of dividends coming out of the ASX this year, and it’s impossible (in my view) to completely map out a comprehensive income strategy as a result, at least for this year. I think including a dividend ETF can help manage this dilemma.

More reading

• 2 ASX ETFs that can solve your income needs
• Forget Westpac’s term deposits and buy these ASX dividend shares
• How to earn a passive income of $50,000 with ASX dividend shares
• 2 quality ASX dividend shares for income investors to buy today
• Looking for dividends? Buy these ASX ETFS in September

Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited and Vanguard Australian Shares High Yield Etf. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and Telstra Limited. The Motley Fool Australia owns shares of Transurban Group, Wesfarmers Limited, and Woolworths Limited. 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.

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