Dividend Paying Companies in A Stock Market Correction
Let’s jump right to it.
Below are the charts of the Canadian TSX Comp, the S&P500 and the NASDAQ Comp.
The first two charts look fine and appear to be climbing in a narrow channel; the tech-laden NASDAQ looks a little shaky.
The question we explore this week is: Does a cycle correction in growth stocks need to be of concern to dividend focused investors?
As always, this is not a one-size-fits-all answer, and you need to evaluate your own risk tolerances to make a decision, but the scope of this weekly comment is aimed at helping you with some guidelines to making such a decision.
The reality is that everything is expensive.
This has been covered in these comments for the past two weeks.
The good news is, as an asset owner (stocks, bonds and real estate) you have benefitted from the price appreciation up to this point.
Included in that reality is a substantial amount of the price appreciation has been driven by monetary policy and speculation. This past week it seems the financial markets have taken notice of the high asset prices and hesitated to go higher, partly in fear of a change in future monetary policy.
The vast majority of the damage in stock prices has been contained within the higher risk names. Technology stock, SPACs and momentum driven companies are lower in price. Dividend paying names and value oriented companies are still holding solid.
At the end of the day, there are only three things you can do: BUY, SELL or HOLD.
What you choose to do really depends upon:
- Risk tolerance.
- Time frame.
- Income requirements
- Personal preference.
Risk Tolerance: A long time ago a wise fellow taught me that by getting a good handle on your clients risk tolerance, you will keep your clients happy and make your (my) job easier. After 34 years, I would emphatically state this is true.
No matter what your financial conditions are, no matter how much rate of return you need to make and no matter how great you think an investment might be; if you don’t balance your risk tolerance to your portfolio you will end up stressed and selling at the wrong time.
Many have forgotten about considering their risk tolerance to their portfolio. The BEAR markets of the past decade have made it easier to buy and hold through sharp declines because they have been of short duration.
But, as the old saying goes, past performance may not be indicative of future results.
Maybe the central banks can continue on as buyer of last resort, or maybe things change at some point. Who knows?
What I do see is a change in the lack of agreement between the US Federal Reserve members at this time.
Historically, whatever disagreements were discussed between members, were kept behind the large oak doors at the Eccles Building. Today, however—more often than not—the Fed members are discussing the ramifications of their long held policies in public domains and the message is no longer consistent.
Tuesday this week saw no less than five Fed members giving speeches.
The narrative of interest rates lower for longer was not stated in three of these speeches. If interest rates are not going to be suppressed by central bank bond buying, what does that mean for asset prices?
In summary, ask yourself how deep of a decline in the value of your portfolio can you live with?
Be honest with yourself.
If the answer is a 20% decline, and you have 80% of your portfolio in the stock market, then you would be advised to do a little selling here near the highs.
Time Frame to Hold: This is an obvious one, but important to consider.
If you are highly exposed to the stock market today and plan to put the funds in a house a year from now, it is time to get a good chunk of the money out of the markets.
A one year BEAR market could easily happen and you would likely feel awful having to sell stocks down 30% to buy the house if that happened.
It is recommended you have a minimum three-year time frame for your stock exposure.
Income Requirements: This is the most difficult part of investing today and causes investors the most stress.
They have $500,000 to invest and they need $2,000 per month to supplement their income to live. That means they need a return of just under 5% before taxes on the money.
When GIC and bonds pay around 1% they know that isn’t going to cut it.
So they hold their nose and buy a bunch of good quality stocks that pay dividends. Yes, they understand the markets expensive, but what else can they do?
Honestly, this is the toughest one to walk a client through. My preference is to buy and hold the dividend paying names, but it is never easy during the declines with people in this situation.
Personal Preference: At the end of the day, your portfolio is your money. No matter what the experts say, you are the one who has to lay their head on the pillow at night and be comfortable with what you own.
If there is some reason you are not comfortable…change it now.
Let me close with a thought: If you are older than 40-years-old, you remember how investing your savings was a more layered process years ago. If you are more than 60-years-old, you remember a time when investing and saving were actually the same thing because interest rates were high enough to pay a return. You also remember that market value declines could take years to recover.
Those days are long gone due to the unfathomable levels of debt created and held by governments, corporations and people. If you would be interested to hear a 10 minute talk summarizing this situation, please reply to my email and I will send one to you.
The investment strategy of the last 20 years has been to borrow as much money as possible, buy every asset you can and when your asset appreciates in value, borrow more money against it and buy more assets.
Friend’s that has been a winning strategy.
The underlying risk to this strategy has always been higher interest rates.
Right now interest rates are the furthest out of sync with inflation data in history. If interest rates are really going to shift to a rising trend, the winning strategy of the last 20 years will become a losing strategy.
Have no idea if this time is the moment of change, but want to remind everyone of that investment strategies come and go over time.
As always, never hesitate to reach out with an email.
Keep well friends, and enjoy the weekend.