Small-cap growth stocks could be ready to turn the corner after a few years of being outshone by large-cap growth, high technology peers.
As the U.S. economy starts to recover from the shock of COVID-19 forced shutdowns, small-cap growth stocks should benefit the most. That’s because they’re largely being valued at or near historical lows. And, that’s good news for small-cap stocks, which have suffered significant under performance in recent years.
Once investors realize that small-cap stocks should have superior potential returns over the next two to three years, you’ll see small-cap stocks’ valuations and their prices rise.
Upwork (UPWK, $13.87) went public on Oct. 3, 2018, at $15 a share. In the 21 months since, the online marketplace that connects freelancers with clients has delivered losses to its IPO investors.
However, despite falling to a 52-week low of $5.14 per share in April, it’s beating the S&P 500 handily year-to-date. That’s thanks in large part to an 85% run over the past three months.
The company has gone through some rotation in the C-suite. In December, then-CEO Stephane Kasriel stepped down from the top job after leading the company since April 2015, long before it became a public company. Taking over as CEO was Hayden Brown, the company’s chief marketing and product officer.
In 2017, the last full year before Upwork went public, it had annual revenue of $202.6 million. Two years later, Upwork reported annual revenue of $300.6 million, 19% higher than in 2018, and 48% higher than in 2017. Analysts continue to expect double-digit revenue growth this year and next.
“Dividend stocks can provide investors with predictable income as well as long-term growth potential.” Motley Fool
Dividend stocks have faced strong headwinds, including payout cuts and suspensions as efforts to fight the pandemic have hampered corporate cash flows.
Yet, investors who have a moderate risk tolerance should consider pursuing a proven dividend-growth investment strategy for income and return in volatile markets. In volatile markets, protecting current income becomes more important than ever for investors. But you also want to satisfy your need for current income and capital growth.
Dividend-paying stocks tend to provide more defensive protection in adverse market environments and they tend to grow over time and protect your real purchasing power. Dividend-paying stocks also tend to have more of a value orientation.
When dividend stocks go up, you make money. When they don’t go up — you still make money (from the dividend). When a dividend stock goes down in price, it’s not all bad news, because the dividend yield (the absolute dividend amount, divided by the stock price) gets richer the more the stock falls in price.
Historically, stocks with rising dividends greatly outpaced the dividend cutters or non-dividend-paying stocks. Further, if you focused on rising-dividend stocks over non-dividend-paying stocks, you would have increased your investment by an average of 4.3% per year over this nearly 48-year study.
So, a $10,000 investment in non-dividend-paying stocks made at the beginning of this study, growing at an average annual return of 8.57%, would be worth over $500,000 today.
However, the same $10,000 investment in dividend growers over the same period at a 12.87% average annual return would be worth an incredible $3.24 million!
That’s not the only benefit. Returns from dividends have also exhibited a lower standard deviation, or variability, over time. Since the overall volatility of a stock’s total return is typically dominated by its price movements, dividends contribute a component of stability to that total return.
Looking for good dividend-paying stocks
Despite challenging economic times, certain companies have grown their dividends during previous downturns; there may be precedent for their willingness and ability to grow their dividends again. While much remains uncertain, the highest-quality companies have proven their ability to grow their dividends over time. They have demonstrated an ability to survive through a range of market environments, even raising dividends during and after previous recessions.
These companies prioritize sustaining dividends in challenging times. They are dividend-paying royalty. However, it’s advised to avoid stocks with very high yields since they could be prone to dividend cuts or suspensions. Seek dividend stocks with a fortress balance sheet providing solid cash flow, reasonable dividend payout yield, above average earnings growth and little to no debt. Avoid companies with heavier debt loads, as measured by net debt (debt minus cash) to earnings-before-interest-taxes-deprecation-and amortization (EBITDA) ratios.
Investors seeking dividend sustainability need look no further than the Dividend Aristocrats: a list of companies within the S&P 500 index that have increased their dividend payouts consecutively for 25 years or more. The 64 S&P 500 Dividend Aristocrats have raised their dividends in an era that spans the Iraq wars, the Sept. 11 terrorist attacks, the Great Recession, and now the novel coronavirus pandemic.
But while the Dividend Aristocrats list is a great place to start for identifying dividend stalwarts, you are advised to avoid the highest-yielding stocks—some of which can be value traps or worse. It is okay to look for companies that are paying a decent amount of their earnings back in the form of income, but if the price moves too high and their dividend yield drops, then you’ll sell the stock and capture the gains.
Additionally, under the recently passed 2020 CARES Act, “companies that borrow money from the federal government may not repurchase stock, pay a dividend, or make any other capital distributions until 12 months after the loan is repaid in full,” according to Goldman Sachs.
Investors should always consider their investment objectives, their comfort level and risk tolerance before investing. And, they should keep in the forefront of their mindset that investment plans do not need to change in periods of high volatility since they should be based on five years or longer time horizon.
For the most part, many wealthy Americans and ‘next door millionaires’ favor for their own investment portfolios and recommend for small retail investors to invest in market index funds or ETF. An index fund is a mutual fund or exchange-traded fund (ETF) that mimics the behavior of an underlying index such as the S&P 500.
Investing in index funds is a winning strategy when playing the stock market for two reasons:
They’re broadly diversified, eliminating the risk of picking individual stocks, and
They’re lower in cost.
If someone does not have the time or inclination to research companies financial balance sheets, management effectiveness and business operations, they should buy index funds. I’ve invested in Vanguard’s ETF (VOO) because of its low fees and its return track the S&P 500 market index. In short, the average American doesn’t have the time, knowledge, and desire to properly invest in individual stocks.
Beating the market versus moving with the market
When you invest in index funds, your goal is to keep pace with the market. That’s very different from the approach taken by stock traders and active mutual fund managers. Stock traders don’t want to keep pace with the market; they want to beat the market.
The trouble is that few people can consistently beat the market over a five or ten year period. According to S&P Indices Versus Active (SPIVA), 80.6% of actively managed large-cap mutual funds underperformed the S&P 500 over the past five years. In other words, beating the market is hard for anyone and especially hard for the part-time investor.
When you invest in an index fund, you’re signing up for the good and the bad. That’s why it’s important to invest for the long term and only invest funds you don’t need for seven years or more. That way, you can ride out the inevitable downturns calmly, without having to liquidate at a low point.
Warren Buffett’s recommendation
Billionaire investor Warren Buffet is a strong proponent of of investing in the market index for most retail investors. At Berkshire Hathaway’s 2016 shareholder meeting, Buffett said that most investors’ best option is to put their money into a low-cost index fund.
Buffett’s reasoning for index fund investing, and for S&P 500 index funds in particular, is that they will match the market’s performance over time — no more, no less. This may sound boring, but the reality is that the market’s performance has been quite good over time, producing annualized returns of 9%-10% on average. And with rock-bottom management expenses, investors will be the beneficiary of virtually all of the gains.
Essentially, investing in a broad basket of stocks, such as the S&P 500 index, is a bet on American businesses, which Buffett feels is sure to do well over time. “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead,” Buffett said in his 2016 letter to shareholders.
I’ve been a disciple and follower of Warren Buffett since 2007. I invested in his company back in 2008 when I found myself wondering how I could get the sweet stock warrant deals like Warren received from Bank of America. Then one day it dawned on me that I could get the benefit of his sweet stock deals by investing his Berkshire-Hathaway stock.
In short, we concur with Warren in the most part. But, I also believe that every American should save and be invested in the U.S. equity stock market if they invest and want to accumulate wealth and achieve financial security.
References:
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
Every successful investing journey starts with a set of clear goals.
When it comes to planning for your financial future, it’s essential to have clear, concise and measurable financial goals — and a good comprehensive financial plan and strategies for reaching them. Sometimes the hardest part is just knowing where to start and what is the destination.
Mass Mutual advises clients to set four basic financial goals; two short term goals (Income & Savings) and two long term goals (Retirement & Debt) — using their simple 5-10-15-20 guidelines:
5: Increase your annual income from all sources by at least 5% each year.
10: Save at least 10% (preferably 15%) of your net annual income each year.
15: Target a retirement “nest egg” of about 15 times your annual income.
20: Plan to have your debt (excluding your mortgage) paid down within 20 years at most.
Goal: 5% Income Increase
While many Americans see their salaries increase about 2% to 3% each year, setting the bar higher will help you maximize your biggest asset: your income. Setting a goal to increase in your total income 5% every year, whether it’s through your salary or other sources of income, can make a big difference over the long run. your personal financial situation.
10% Yearly Savings
A good rule of thumb is to save 10% to 20% of your net income each year. This could help you to take advantage of opportunities that may arise, like finding your dream home or investing in a new business venture. It also can provide a cushion in case of emergencies. You can increase the amount you save by setting aside a little more of your salary each month and cutting back on unnecessary expenses.
15x Salary Retirement Nest Egg
As you get older, you’ll have a better sense of your true retirement needs. For now, we suggest trying to accumulate a total of 15 times your current gross annual income for
retirement. The goal is to end up with a nest egg that could generate about 75% of your current annual income each year in retirement.
20-Year Debt Pay-Down
Many of us are burdened with debt, including student, credit card, auto and other loans. By understanding how long it will take to pay down your debt and working towards a debt elimination plan with set timelines, you’ll be better able to manage not only your debt, but your savings and retirement, too.
We’re witnessing the most explosive stock market in history. We’re seeing a spectacular stock market rally.
We’ve witnessed the greatest 50-day rally in the history of the S&P 500. The S&P 500 has increased 37% over the past 50-days.
Ten weeks ago, March 23, 2020, the Dow dropped all the way to 18,591 points. The biggest gain ever in such a short timeframe. Today, June 4, 2020, the Dow Jones index has peaked above 26,274 points.
Why…T.I.N.A. (There is no alternative to stocks)
There are fewer publicly traded companies to invest in today than thirty years ago. In the 1990’s, there were about 8,000 companies listed on American stock exchanges. Today, there are about 4,000 publicly traded companies on American stock exchanges which represents a fifty percent cut.
Furthermore, there are fewer shares of company stocks available to be traded. Share buy-backs by U.S. companies have taken 20% of companies’ shares off the market.
Essentially, the number of available shares have been dramatically cut, yet the demand for share have been vastly increased the demand for shares. The market is awash in cash from the Federal Reserve loose monetary policy and trillions of dollars from 401K plans.
Economics 101 reveals that cutting the supply of stocks while increasing the demand for stocks cause the price of stocks to go up.
And don’t forget about investor psychology, the economy has entered the return to work phase and the economy is on the move again. Animal Spirits are on the rise again.
Regarding the S&P 500 index, 159 stocks in the index are up for the year an average of 13% / 350 are down year-to-date an average of 20%. And, there are $4 trillion still sitting on the sidelines in money market accounts.
FOMO (Fear of missing out)
Fear of missing out can be extremely expensive. When the equity market has explosive moves where it goes up this high and this fast, an investor can feel that they’re “being left out and left behind”. As a result, they start paying top dollar for expensive and overbought stocks. That is no longer investing…investors are buying high hoping for higher.
Whatever financial challenge you’re facing, you can put yourself in a better financial position by setting goals, planning now and investing for the long term. The sooner you start, the sooner you’ll get on track.
Investing for the long term in order to grow your money is a marathon, not a sprint. An investment’s annual return provides perspective and growth over time.
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Goals: Create clear, appropriate investment goals. Create appropriate investment goals you can measure and attain. Defining your goals clearly and planning realistic ways to achieve them can help protect you from common mistakes that could derail your progress.
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Balance: Develop a suitable asset allocation using broadly diversified funds. Create a sound investment strategy by choosing an asset allocation in line with your financial objectives. Build your allocation based on reasonable expectations and diversify your portfolio to avoid exposure to unnecessary risks. Balance is the key:
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Costs: Minimize costs. Markets are unpredictable. Costs are forever. The lower your costs, the greater your share of an investment’s return. And research suggests lower-cost investments outperform higher-cost alternatives. You can’t control the markets, but you can control your costs and tax liability:
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Discipline: Maintain perspective and long term discipline. Investing can provoke strong emotions. During times of market uncertainty, you may find yourself tempted to make impulsive decisions or you may experience “paralysis by analysis,” unable to decide on how best to implement an effective investment strategy or when to rebalance your portfolio. Discipline and perspective can help you remain committed to a long-term investment philosophy through periods of market uncertainty.
Planning, consistency, and sound fundamentals can improve results.
FIDELITY VIEWPOINTS – 03/19/2020
For most people, achieving success as an investor means reaching their financial goals, like owning a home, paying for college, or having the retirement you want.
What separates the most successful investors from the rest are habits. It is the reason why some individuals successfully accumulate wealth while others seem unable to save and invest successfully. Essentially , it can be traced back to daily habits.
Investing can be complex, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and be aware of taxes, you will have adopted some of the key traits that may lead to success.
Here’s the most important piece of advice for long-term investors: Don’t panic.
Both the current pandemic driven economic environment and equity market environment are incredibly uncertain. Likewise, the future is equally uncertain and unpredictable.
Unprecedented unemployment, declining oil prices, liquidity concerns in financial markets, and expanding federal debt represent a clear and present risk to future U.S. economic prosperity.
Moreover, the current uncertainty has had a negative impact on global economies and equity markets. The impact has created fear and caused investors to panic sell their positions and seek safe havens by moving into less riskier assets.
Yet, it is important to understand that market corrections happen on a regular basis. A stock market correction is a sudden drop in the value of stocks, usually by more than 10% from their most recent high.
Bottomline, it’s going to be okay. This too shall pass. Investors are advised to ‘stay the course’, follow your financial plan and focus on your long-term goals.
The global financial crisis of 2008 proved no one can consistently predict how the market will perform. Thus, it is best for investors to stay invested in the markets.
“You always have to remember the markets are forward-looking, and you don’t know when they’re going to take off—just like you don’t know when they’re going to tumble. So it’s best to be invested than to try to time it, because it’s close to impossible.” Tim Buckley, CEO, Vanguard Investments
If you’re confident in your financial life plan and investment strategy, leaving your investments alone during short-term market corrections and Bear markets could help you accumulate wealth over the long-term and help ensure your retirement nest egg.
