SOMETIMES trying to pick the eyes out of sectors rather than individual stocks can be a low-risk and profitable exercise.
Early last month we looked at the seasonality of the banking sector since the 45-day holding period for franking was introduced in 1997. Research by Veritas Securities analyst Andrew McCauley revealed that it is most beneficial to own Australia's big four banks in March, April and October.
Investors buy into the banks so they qualify for franking when three of the big four banks go ex-dividend in late May or early June and again in November.
The data shows the banking sector has, on average, risen 5.3 per cent in the consecutive months of March and April since 1997. In October the sector has another spurt, jumping on average 3.74 per cent. These three months have made up the entire yearly gains for the sector over the past 15 years.
Obviously, the sector is like a magnet for investors hooked on large, fully franked dividends. Interestingly, Commonwealth gets dragged along for the ride even though it goes ex-dividend three months earlier.
As we approach the end of April, this year's performance has mirrored previous years. ANZ has risen 8.1 per cent since the beginning of March while NAB is up 6.4 per cent and Westpac is 7.5 per cent higher.
Once again CBA has also been carried along for the ride, firming 6.2 per cent, once you include its dividend payment made during the period. This compares with a meagre gain of 1.8 per cent over March and April for the broader market, measured by the All Ordinaries Accumulation Index.
So should we sell out of the banks and leave the dividends for someone else? Since 1997 the sector has declined 0.52 per cent in May and 0.44 per cent in June. If you do not need franking, it is probably worth parking your money elsewhere until some time late in September. Alternatively, those investors such as superannuation funds may want to stick with the banks and pick up three fully franked dividends over the next 13 months. This will deliver a 10.5 per cent yield, which grosses up to about 14 per cent once franking is considered.
Hopefully, there may be a capital gain over the period as well. This later scenario is being boosted by the prospects of lower official interest rates in the coming months.
STAYING with the banking sector, the joyous months of March and April have not been so kind to the smaller regional banks this year.
Suncorp Group, Bendigo & Adelaide Bank and Bank of Queensland have flatlined once dividends are taken into account. The minnows of the market Wide Bay Australia and MyState have actually dropped 5 per cent and 7 per cent respectively. Most of these stocks go ex-dividend in March or April and are in a different dividend cycle to Westpac, ANZ and NAB.
The market, though, has shunned these businesses even though they yield fully franked dividends between 6 per cent and 9 per cent.
With system lending growth in the low single digits and funding costs edging higher, investors are concerned their capital is at risk in these smaller lending organisations. This is a genuine fear given the increasingly tough environment.
At some stage, though, these types of dividend yields will become appealing, especially if official interest rates are cut, providing a catalyst for investors.
Former fund manager Matthew Kidman is director of WAM Capital. The Age accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.