Luscious Dividends.

Browsing the Cellestis report from Shaw Stockbroking got me thinking again.


Now there's nothing to say that their numbers are correct but let's just for a moment presume that they are.


Perhaps I'm a bit different from other people in that I am totally interested in the return that I get from my investments, not what I might get if I sold them. That is, I don't care too much about the Share Price. My preferred position is to own an investment that returns me so much that there is no incentive for me to sell that investment to get a better return elsewhere. (it's just too much work pressing that sell button).


In other words, it's dividends that excite me.


Look at the predicted dividend flow as projected by Shaw:


2011 7c
2012 10.5c
2013 15c
2014 24c
2015 30c
2016 39c
2017 48c
2018 54c


If we consider a decision to hold as being the same as a decision to buy (do I need to explain that?) then we can see that based on the current price of $2.55 the dividend yield becomes


2011 2.7%
2012 4.1%
2013 5.8%
2014 9.4%
2015 11.7%
2016 15.2%
2017 18.8%
2018 21.1%



If, like me, you hold them in your superannuation fund in pension phase then it makes sense to "gross up" the dividends to account for the franking credits that the Government will so generously give back to us


Now, our returns are something like


2011 3.8%
2012 5.8%
2013 8.2%
2014 13.4%
2015 16.7%
2016 21.7%
2017 26.8%
2018 30.1%


To my way of thinking, 5.8% is an okay return (2012), 8.2% is a good return (2013) and 13.4% and up is a bloody fantastic return. It's not long till 2012 and not much longer (one year, actually!) till 2013. I reckon I can suffer another couple of years of cabbage soup and lard on stale crusts till these chickens come home to roost.


Seriously, it doesn't look too shabby to invest some money now (= hold), believing that you will get a 3.8% return for the next 8 months (that's an annual rate of 5.7%), 5.8% the next year, 8.2% the following year, etc etc.


Of course the dividends, in the harsh reality of the future may actually end up being bigger or smaller than projected but you have to believe in something, right?


I do understand that people look at it quite differently and will assess the yield on an ongoing basis as the share price changes. There's nothing wrong with that. It's just that I look at my investments more as I would look if I was buying an entire business. If somebody proposed a business venture to me (that I believed in) with those projected returns then I would be quite interested. If I owned such a business I wouldn't be asking potential buyers what they might be willing to pay me for it each and every day.


None of this is to say that if the rest of you go crazy and offer me a ridiculously high price for my shares that I wouldn't sell them to you (just as I would with the business venture). I'm not that crazy.


The question that anybody considering purchasing CST shares would have to consider is what is the best time to buy to achieve the maximum return with the minimum risk. As time moves forward the risk may diminish but, no doubt, the share price will increase. I guess each purchaser would need to make that assessment (guess) for themselves. Based on the figures above I'm quite happy to hold. (Actually, I'll let you in a little secret, I did buy a few more last week).


(coffee break)


My above thoughts got me thinking some more (on a roll today).


The other side of the story is about if you decided to sell your CST (or any) shares today, or at any time. In essence, you would be selling the future cash flow for a price today. In essence you would be "betting" that the money that you receive can earn you a better return elsewhere. This goes on all the time in the financial markets. It is why fixed interest bonds will be traded at prices quite different from their face value (and why they will often be quoted with an "effective interest rate") It is actually what share traders are doing (though they mostly don't actually realize it).


This is why an investor-centric discounted cash flow (DCF) is so useful. It enables us to turn our belief about the future into a financial metric that we can use to make our investing decisions. We can either use it to determine an effective rate of return or to determine what price we should pay to achieve a required rate of return.