There’s lots of evidence that dividend stocks are getting expensive. For example, this article from the Wall Street Journal (The Problem With Dividend Stocks) says that “investors have pushed up their prices so high that history says they likely aren’t worth buying anymore.†Or this one that says “Going for the highest yields may backfire.â€Â But what’s an income-focused investor to do? Rather than simply venting about how the Fed is punishing savers with their artificially low interest rates (they are), we have three tips and three investment ideas that we believe are worth considering.
1. Don’t panic, don’t make silly mistakes
Wall Street loves it when volatility ticks up (like it has in the last week) because it makes it easier for them to get their hands on investors’ money. How so? Because trading volumes increase. Wall Street gets a cut on every trade. Whether it be bid ask spreads, commissions, or high speed traders front running your orders, small amounts add up fast and compound over time. This is one of the best reasons we believe in long-term investing. Simply put, trading out of fear can lead to very costly mistakes. Buying and holding is a proven strategy for long-term success.
2. Diversify
For starters, if you are an income-focused investor that doesn’t mean you have to buy only the highest yielding investments. For example, an unusually high yield is often a signal of distress. Since dividend yield is simply dividend divided by price, the highest yielders are often the ones that have recently fallen the furthest, and that can signal more declines (or perhaps a dividend cut) ahead. We prefer a total returns approach whereby investors meet some of their income needs through dividends, but some is generated selling stocks that have appreciated in value. Capital appreciation can be every bit as viable as dividends in generated much needed income. Plus, it allows for a more diversified strategy which can help reduce risk (i.e. you can buy quality stocks that don’t have enormous yields). Also, don’t lose sight of your long-term goals. Even in our current low interest rate environment, it may make perfect sense to own high quality bonds or low risk cash instruments (that allow you to sleep at night) instead of owning riskier stocks, if you are able to generate enough income to meet your needs.
