Has the Australian Stock Market Crash Finished?

For as long as I can remember, investors, especially retirees, have invested in high dividend-paying stocks to generate income. While this strategy has some merit, I could argue the opposite. It has often been a good strategy to hold banking stocks long term to collect dividends. However, over the past five years, banks have fallen heavily. 

Take Telstra, for example, which has fallen over 60 per cent for almost a decade, although it has been rising over the last couple of years.

Is dividend investing still a viable strategy?

When a stock falls heavily, its dividend yield increases, which makes it attractive to investors. But you have to ask yourself: 'Is it smart to invest in a company that is falling in value?' Think about it: why invest in a stock for a 5 per cent dividend yield when the price is falling significantly more than the dividend you would receive? It just doesn’t make sense.

If we look at three of the big 4 banks, including ANZ, NAB and WBC, the fall from their 2015 highs is well over 50 per cent, while CBA is down over 30 per cent. In March of this year, they all fell further during the coronavirus crash, and their dividend yields rose as a result. ANZ, NAB and WBC were paying dividend yields over 9 per cent while CBA was paying over 6 per cent.

Now here is the kicker: investors want certainty, and when they see a high dividend yield, they expect to receive this year in and year out, but unfortunately, this is a false assumption. When the share price falls, it often means the company's earnings are also falling. Consequently, the dividend payout will often be reduced or cut altogether.

In current market conditions, banking dividends are not only in jeopardy of being reduced, but in some cases they are in danger of being cancelled altogether. So this begs the question: Does dividend investing still have a place in your investment strategy? In my opinion, it's better to invest in stocks that are rising first rather than simply looking at the dividend yield.

What were the best and worst performing sectors last week?

While all of the sectors in the Australian stock market traded down last week, things were not as bad as you might think. Utilities was the top performer down 1.6 per cent followed by Materials down 2.5 per cent and Energy down 3.69 per cent. The worst sectors included Industrials down over 7 per cent, Consumer discretionary down over 5 per cent and Healthcare down just under 5 per cent.

While those negative figures sound bad, the downturn was orderly rather than driven by panic, which is a good sign.

Among the ASX top 100 stocks, Evolution Mining topped the list, up over 9 per cent, followed by Northern Star Resources, which was up over 4 per cent. Crown Resorts, Ausnet and JB Hi-Fi were also up around 2 per cent last week. The worst performers included Challenger down over 15 per cent, while Lend Lease, Reliance Worldwide, Virgin Money and Flight Centre were all down over 13 per cent.

What's next for the Australian share market?

Over the first three days of last week, the Australian stock market fell around 7 per cent at one stage before finding support and rising. In my previous report, I noted that the market was indecisive and showing signs of weakness, which last week's down move confirmed. 

Right now, it is a very interesting time in our market, as what unfolds next will signal what we can expect over the coming month or more. If the All Ordinaries Index stays above 5,000 points over the next week or so and starts to rise, we're most likely to experience a more sustained rise over the next month to six weeks.

That said, we still need to be mindful that we may not have seen the end of the current stock market crash; therefore, I cannot discount the possibility the market may fall below the low of 4,429 points set on 23 March. 

So, while the market is looking a little more positive, we are not out of the woods yet, and it will only take some bad news for another wave of heavy selling to occur, which is why I continue to encourage you to be patient until the dust settles.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores.