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Roller Coaster

For me the most anxiety producing aspect of a Roller Coaster ride is at the beginning when the mechanical chain is hoisting it to the top. With each rise in elevation, there is this clicking sound and I know that soon the biggest drop of the ride is about to occur.

The recent stock market declines feel like the first plunge off the peak that pushes your stomach, and sometimes your lunch into your throat.

For those clients that remember 2015-2016, I was a doomsayer. I said things like Bull Markets typically run for 7 years before they decline. We should prepare for a stock market correction. Still others heard me say stock market corrections (a decline of 20%) are healthy. They keep markets from becoming a bubble. Guess I was late in my predictions. We may very well be at the end of the longest Bull Market in modern history.

But does this mean the Roller Coaster is coming off the track? Or simply going to go up and down, making us scream, only to come safely back to reality? All good questions.

For those of you that are clients, I have positioned the equity (risk) portion of your investments into Dividend paying stocks. For the past year, the Dividend portfolio hasn't "grown" as much as other investments in the market. But the growth markets aren't my concern. The down markets are. In the following recap, I'll explain why Dividend paying stocks are better in my opinion then mutual funds or ETFs.

  • Dividends are paid on the number of shares you own NOT on the market based value of those shares.* To use the farming example, there is the value of the land, and then there is the income made from selling the crops. If you own 100 acres of farm land worth $250,000 and you sell crops for $12,500 each year, what if the land goes down in value (think 2008) and is now worth $200,000 (20% decline)? Guess what, the crops still sell for $12,500.
  • Dividends are paid on the number of shares you own NOT on the market based value of those shares. To use the Rental Property example, there is the value of the house, and then there is the income from the rent. If the property value goes down, does this mean your renter pays less each month in rent?
  • Dividends that you take as income: You can spend that income without selling the stock shares at reduced market prices.
  • Dividends that you "reinvest" by selecting the company give you more stock shares instead of cash works real well for you in down markets. The same dividend buys more shares of the company since share prices are lower. Thus when the market recuperates, there is a boomerang effect.

For those that own our Dividend portfolio, history has shown us that in 2002, and in 2008 the portfolio went down less than the broader markets and recovered quicker than the markets as well.

Just remember, it's not the value of the account that puts money in your pocket. Its the number of shares you own and the dividends you collect. 

Personally I’ve learned from 2001-2002 and what happened to the high flying growth stocks. I’ve learned from the 2008 real estate and economic meltdown, and that is why I’m so defensive. That is why for the equity portion of my clients accounts, we buy profitable companies that pay dividends. My primary motivation is income planning and dividends pay that income. Personally that is the only way I can sleep at night during bad markets is I know the retirement paychecks via dividends still roll in. 


As always, I'm here for each and every one of you if you want to chat.


P.S. China- There are real concerns here and it will take some time to work things out.
However, the majority of our stocks are American companies.
China owns a large percentage of our national debt. That means this is a liability on our side, and an asset on their side. Logic says investors don't want their assets to go out of business.