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
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.
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.
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.