Why Dividends Are Important

     Here we are in the midst of a stock market correction. It's a scary time for working people who are worried about their retirement funds. For nine years we have gotten used to seeing steady gains in the value of our 401k's and IRA's. The next statement from your broker may shock many savers into panic selling or even a more disastrous move into the bond market via bond mutual funds. I believe in a "buy and hold" strategy for stocks for the most part. The stocks I want to hold for the long term are companies that have strong, established businesses that pay an attractive dividend. A dividend of only 2-3% may not seem too impressive now, but in the long run it can be a significant portion of your total return. If you look back at the total return of the Dow Jones' 30 stocks for 100 years, the total  return is 9.4%. Of that, about half is price appreciation and about half is dividend yield. Therefore, without dividends, your return would be about half as much. When a company increases it's dividend on a regular basis, your investment yield increases as you hold the shares. Remember, your investment yield is based on the amount you have invested and not the current price of the shares. Market pundits call a 10% decline in stocks a correction and a 20% drop is a bear market. We are not in a bear market yet. The average bear market lasts about 10 months but several have lasted over 20 months, one in 1973 and another in 1980. It's not likely that during these down markets that you will see any price appreciation of your portfolio but that portion of total return from your dividend is likely to be intact. Many companies are loathe to cut a dividend that has been paid to shareholders for many consecutive years. When I look at the fixed income universe for attractive and safe places to put my money, I don't see anything that compares to dividend-paying stocks with good long-term records of paying dividends.

What Goes Up....

          It's happening. This stock market is finally correcting. Everyone knew it would, we just didn't know when. At the time of this post, the Dow Jones Industrial index is off about 8%. I personally think there is more pain to come, possibly up to a 20% haircut or more. At times like this, all stocks are at risk of being punished. The latest good earnings report is ignored, the future expected earnings are ignored, rational decisions are not being made. Just like leaving a crowded movie theater, everyone wants to get to the exit at the same time. What should the long term investor do at a time like this? I am looking over my portfolio for positions that I want to add to. As my readers should know by now is that when I have bought shares recently, I have only bought 1/3 to 1/2 of what I wanted. That way I can take advantage of lower prices to fill out my positions. It's also a good time to consult your annual forecast and begin to position yourself according to your prognostications. You DID make a forecast didn't you? If not, it's not too late. It only takes about an hour and could make you thousands of dollars. Some of the new positions that I want to add to my portfolio includes at least one FANG stock and one defense related company like Lockheed Martin. These issues have been just too rich for my blood so I'm looking for a more attractive entry price. Having cash on the sidelines at a time like this gives me peace of mind and ammo to gun for bargains. There is one group of investors who are dancing in the streets right now- they are the short sellers. As described in my post "the short sale", these guys profit from a declining market. They have had a long dry spell so I hope they are happy now. At some point, short sellers will have to "cover" their positions which will help end the slide. That means that they will have to buy the shares that they had borrowed and sold. This short covering plus bargain hunters, will eventually put a floor under stock prices. In my opinion, what really spooked this market is the fact that the yield on the 10 year treasury bill got too close the that 3% point. It reached about 2.84% before the sell-off. One major fear of wall street professionals is what is called an inverted yield curve. It almost always predicts a recession. Basically, an inverted yield curve is when short term rates are higher than long term rates. Buying a 30 year bond is riskier than buying a 10 year instrument and thus should yield more. In conclusion, this sell-off is long overdue and actually healthy for the market. Stocks had simply gotten ahead of themselves and this shake-out will help determine their fair value.

Stocks, Bonds, and Interest Rates

     I should have posted this a long time ago. I want  to explain what a stock is and how it is different from a bond and how interest rates affect both. First, a share of stock is actually ownership in a company. If you have one share of Intel, you own the company along with 6.8 billion other shares. Your percentage of ownership is so small, I don't even have a calculator to figure it, but that dosen't mean you won't make money by holding the stock. In contrast, owning a bond issued by Intel, is simply you making a loan to the company for a predetermined amount of interest paid to you. Which investment is better? The answer is dependent on many factors including your investment objectives. Regular readers of this blog know that I am not recommending the purchase of bonds at this time. The reason is that in a period of increasing interest rates, the principle of your bond investment WILL decrease in value if you sell it before maturity. Just like stocks, bonds offer investors the opportunity to lose their investment dollars. FYI, the total value of the U.S. bond market is about 40 trillion dollars, in contrast, the total value of the U.S. stock market is just 20 trillion dollars give or take a trillion or two. So the bond market is twice as big as the stock market. On a daily basis, bonds trade about 700 billion dollars a day while stocks only trade about 200 billion dollars. Bonds come in all shapes,sizes, and flavors: Muni bonds-issued by states, cities and counties (these are free from federal taxation), corporate bonds-issued by companies to raise money for operations, government bonds-issued by Uncle Sam to finance the huge budget deficit, and individual agencies of the U.S. government to finance operations. There are too many details of each type for this forum, but I would be glad to answer any questions on any if I can. There is a time for stocks and a time for bonds, and a time for safe investments that avoid them both. I still like stocks at this point for reasons explained in previous posts. Bonds had a long and profitable run for about 20 years but that ended after the financial crisis in 2008. I want to hold bonds during a period of DECREASING interest rates which we are not in now. Therefore, I have sold most of my bonds except the ones that I plan to hold to maturity. I have also sold any mutual funds that are "balanced" because they have a bond component which could cause losses in the future. As for interest rates, I only keep a close eye on the 10 year treasury, it is currently at 2.74%. The stock market is getting jittery because this rate is increasing rapidly. In my opinion, the 3% range will spell trouble for stocks because it makes fixed income investments like CD's attractive to investors. That's why I own both CD's and stocks. I sleep better knowing I have deposits in the local Credit Union that are safe and sound and also have stocks that can benefit from Trump's tax cuts to corporations.