Tag Archives: Stocks

Dividends are Important in Retirement

Posted on by

“Get paid to wait” Kevin O’Leary

Noted Shark Tank investor, Kevin O’Leary aka “Mr. Wonderful”, has one simple rule when it comes to investing in a stock. If it doesn’t pay a dividend, he does not consider the stock. His investment mantra is “get paid to wait”.

“My whole investment strategy is built around cash flow”, O’Leary said. “I have a little Charlie Munger on my shoulder every day when I look at a deal, and he’s just saying two words: ‘cash flow, cash flow.'”

Know your cash flow.

How much do you make after taxes? How much do you spend. Investors in retirement must figure out how to generate cash flow without a job from multiple income streams to meet essential living expenses and spending while also making sure they don’t outlive their income stream.

Receiving regular dividends, or “getting paid to wait” reduces an investor’s dependence on the market’s volatility and the roller coaster like price swings by stocks to make ends meet.

Essentially, dividends could become investors “cash flow” in retirement. Naturally, then, the best retirement stocks to buy in 2021 (or any other year) to accomplish those objectives are ones that pay dividends.

Regular dividends lessen an investor’s dependence on the market’s fickle price swings because it reduces or eliminates the need to sell shares to generate income. Regardless of whether the market rises or falls in 2021, a portfolio of high-quality companies can provide you with predictable, growing dividend income.

And in today’s low-interest-rate environment, dividend stocks can generate much higher income than many fixed-income instruments. Better still, many dividend-paying stocks grow their payouts, which preserves those dividends’ purchasing power. And dividend stocks, like other equities, also provide meaningful long-term price appreciation potential.

Whether or not the market rises or falls, a portfolio of quality businesses delivering predictable, growing dividend income is always preferred.

Dividend stocks, like other equities, can provide long-term price appreciation. Dividends are the periodic payouts investors can earn by investing. And because many companies pay a dividend — more than 80% of the S&P 500 stocks currently pay dividends, according to data from FactSet — investors can actually earn money even when the market is down.

Research firm Simply Safe Dividends published an in-depth guide about living on dividends in retirement here. However, a key component to this strategy is finding the best retirement stocks that can deliver safe dividends and grow in value over time.

What are Dividend Stocks

When investors buy stocks, they can make money two different ways. The first is by selling their shares for a price that’s higher than their original cost. The second is by collecting dividends. Dividend stocks are companies that pay shareholders a portion of earnings, as dividend, on a regular basis. Not all stocks pay dividends, but those that do offer shareholders a steady stream of income.

These payments are funded by profits and cash flow that a company generates but doesn’t need to retain to reinvest in the business. Shareholders can receive dividends as cash or additional shares of stock. As an investment category, dividend stocks also have an impressive track record of helping people build wealth over the long term.

To live on dividends in retirement, a key component to this strategy is finding the best retirement stocks that can deliver safe dividends and grow in value over time. Look for companies with a history of paying and increasing dividends, as well as sufficient earnings and cash flow from current operations.

Dividend Aristocrats

Dividend Aristocrats are a select group of S&P 500 Index stocks with a history of 25+ years of consecutive dividend increases. These businesses have both the desire and ability to pay shareholders rising dividends year-after-year. They are considered the ‘best of the best’ dividend growth stocks.

The Dividend Aristocrats have a long history of outperforming the market. The requirements to be a Dividend Aristocrat are that they’re in the S&P 500, have 25+ consecutive years of dividend increase, and must meet certain minimum market cap and liquidity requirements.

Dividend Yield

Dividend yield refers to a stock’s annual dividend payments to shareholders expressed as a percentage of the stock’s current market price. A stock’s dividend yield can and frequently does change over time, either in response to market fluctuations or as a result of dividend increases or decreases by the issuing company. And, it’s important to keep in mind that a high dividend yield alone doesn’t make a stock a great investment.

Dividend amounts and yield might seem small in mid-2019. The average dividend payment for U.S. stocks was 1.87% of your investment, according to Siblis Research. Regardless the size of the ratio, they can drastically impact an investor’s long-term investment performance and retirement income.

GE’s Dividend Story

General Electric (GE) has been one of America’s most widely held stocks, and countless retirees relied on the dividend payments. But, the company was under enormous balance sheet and cash flow pressure, and it became necessary to cut the dividend in half. By cutting, GE saved significant cash flow making it one of the largest dividend cuts in the history of the S&P 500 and the biggest for GE since 2009, according to S&P Dow Jones Indices.

But dividend cuts had been rare at the time since many companies were increasing them because the U.S. economy was healthy and the stock market was booming. GE’s dividend had been reliably paid for multiple decades.

Prior to GE Board’s decision to cut its dividend, GE was having problems and could not earn enough money to cover its dividend payments. Free cash flow, which measures how much cash is being generated after investing in the business, had deteriorated for six straight years.

Dividends: Cash Flow is King during Retirement

The distinction between income and cash flow is important during retirement. Generating income in retirement is focused on finding investments that pay a high yield, which necessarily means taking on more risk. Focusing instead on cash flow allows investors to take a broader perspective, assessing various aspects of their finances to determine how to creatively produce the money required for expenses. Cash flow strategies may allow retirees to reach their financial goals while not necessarily taking on a higher level of risk.

A primary financial goal in retirement is to guarantee a minimum daily standard of living so you don’t outlive your nest egg and can sleep well at night.  Some folks are able to meet that minimum income amount they need through some combination of pension income, Social Security payments, and guaranteed interest from certificates of deposit. 

 “I have found that retirement is all about cash flow, not net worth, especially after the real estate crash. I have met people who have a net worth of $2 million, which looks great on paper, but when it comes to retirement income, they are just barely squeaking by on their Social Security and a small pension. It’s great that you are worth $2 million, but ultimately, it’s your cash flow that will determine your quality of life in retirement, not your net worth.” Jason R. Parker, Sound Retirement Planning: A Retirement Plan Designed to Achieve Clarity, Confidence & Freedom

When picking dividend stocks, chasing yield can cause issues where the price has declined, which may be an opportunity for capital appreciation, but may create greater risk for income seekers since the stock may be cheap for a legitimate idiosyncratic reason.

It’s important for investors to find a company they feel comfortable with, and whose product line they understand. Next, they can look at the company’s ability to generate sufficient earnings and cash flow to pay their annual dividends, operate their business, and have enough left over to grow, remembering that not all quarters must indicate growth.

An investor’s particular situation must be considered such as their required income needs during retirement, weighed against their desire for capital growth— typically, lower-growth segments, such as utilities, pay more yield. Investors who allocate upwards of 80-100% of their portfolio to dividend-paying stocks to generate more income and achieve stronger long-term capital appreciation potential and income growth, are incurring greater risks.

Additionally, their specific risk/reward trade-off (and there is risk in all stocks), keeping in mind their ability to ride out a downturn without having to sell the stock on the way down.

References:

  1. https://markets.businessinsider.com/news/stocks/shark-tank-star-kevin-oleary-investing-yahoo-short-retail-pandemic-2021-1-1029932948
  2. https://www.kiplinger.com/investing/stocks/dividend-stocks/602016/21-best-retirement-stocks-income-rich-2021
  3. https://www.simplysafedividends.com/intelligent-income/posts/1-living-off-dividends-in-retirement
  4. https://www.forbes.com/sites/jonathanshenkman/2020/10/21/7-strategies-to-generate-sufficient-cash-flow-in-retirement/?sh=2fe4062b2ac4#click=https://t.co/qv3DensgA1
  5. https://www.spindices.com/documents/education/indexology-december-2017-can-dividends-yield-a-better-retirement.pdf?force_download=true
  6. https://www.fool.com/knowledge-center/dividend.aspx
  7. https://www.fool.com/investing/your-definitive-dividend-investing-guide.aspx

The stock market is not the economy

Posted on by

The stock market is not the economy, rather it is one variable that indicates how the economy is doing and may perform down the road.

“The stock market is a market where stocks, a type of investment that represents ownership in a company are traded,” said Jessica Schieder, a federal tax policy fellow at the Institute on Taxation and Economic Policy. The stock market is where investors attempt to predict what’s going to happen in the economy or with a company’s stock price.

In contrast, the economy is a sum of goods and services, all of the things produced measured by gross domestic product (GDP).

“The stock market can be moody,” explains Laura Gonzalez, associate professor of finance at California State University, Long Beach. “Sometimes the stock market is positive about the future and sometimes it’s negative about the future.”

So remember, the stock market is not the economy. And the economy is not the stock market. But they are related.

References:

  1. https://www.marketplace.org/2019/09/30/the-stock-market-is-not-the-economy/

Owning a Successful Business Is the Single Best Way to Accumulate Wealth

Posted on by

Successful investing for the long term and accumulating wealth are about owning a portion of a successful business. It is the single best way to accumulate wealth.

It is extremely difficult for individuals to accumulate wealth by earning income and slugging their way through a 9 to 5 job. It’s very hard to get truly wealthy by renting out your time. Bottomline…you can only work so many hours. 

Even high earners like corporate executives, doctors and lawyers don’t typically earn millions of dollars a year. Instead, the path to amassing vast fortunes is paved by owning assets like stocks of a successful business and allowing the assets to to appreciate in value and work for you.

The single greatest wealth-building secret on the planet and the path to amassing vast fortunes is paved by owning a successful business through investing for the long term in stocks. Controlling vast sums of stock market wealth is a common thread among the world’s wealthy.

That doesn’t mean you have to create and build the next Tesla, Amazon or Walmart. You can “piggyback” on billionaire CEOs like Bezos by buying shares of their companies on the stock market.  This is the playbook many wealthy folks follow.

Recent data from investment bank Goldman Sachs shows the wealthiest 1% of US households own more than half the stocks in America. At the end of 2019, they controlled $21 trillion in stock market wealth.

Over long term, ownership of companies through stocks have outperformed bonds and most other asset classes. This makes sense when you think about it. Stocks are riskier than bonds, so you expect to earn a higher return on capital. 

When you save for the future by paying yourself first and invest for the long term your capital in a successful business, you accumulate assets that earn money while you sleep. For example, by owning Amazon shares, every time the stock soars, your net worth increases.

When Amazon crushes earnings, you win, too. Think of it as a second income that often brings in more than your main job.

References:

  1. https://www.forbes.com/sites/stephenmcbride1/2020/08/19/why-owning-stocks-is-the-single-best-way-to-get-rich/#6ede923248ec

It’s a Stock Market Bubble | Barron’s

Posted on by

Excerpts from Barron’s article entitled:Yes, It’s a Stock Market Bubble. That Doesn’t Mean Trouble for Investors Just Yet.

By Ben Levisohn, September 12, 2020

“Every stock market bubble begins with a story.”

“”The story began easily enough, if not with “once upon a time.” A virus forced the country to shut down and accelerated the gains in a select few technology stocks that are uniquely capable of thriving with everyone stuck at home. A central bank took quick action to prevent financial markets from seizing up, pushing interest rates about as low as they could go. That helped lift the stocks of companies that are growing, including chiefly the aforementioned tech stocks, even if some have no profits. These stocks were among the first to rally once the stock market bottomed in March.”

“Now, get ready for the plot twist: Good investment ideas can stop being good ideas if the story goes on for too long. The tech trade—including tech companies that aren’t officially labeled as such—went too far before correcting suddenly in the past two weeks.”

“The forces that drove stocks such as Apple and Amazon.com to astonishing heights remain firmly in place. They include the companies’ continued growth, the Federal Reserve’s determination to do whatever it takes to keep the economy afloat, retail investors’ newfound interest in trading, and maybe even a bit of fiscal largess.”

Stocks will remain volatile, but the tech bubble will continue to inflate.

“For an investment bubble to occur, there has to be a widespread belief that a new paradigm has taken hold requiring an adjustment in valuations far beyond what previous fundamentals would imply. This belief needs to engage the imagination of investors beyond Wall Street, and there must be plenty of capital available to chase stock prices higher. The Covid-19 crisis has unlocked all three prerequisites.”

“Consider how the world has changed in the past six months. Social distancing is now the rule, and working from home is encouraged, when possible. Movie theaters are half-empty, and attending school now means opening a laptop at home for many students.”

“Companies that bring us a taste of our previous lives—such as Zoom Video Communications (ZM) and Peloton Interactive (PTON)—have seen their share prices soar. Shares of tech titans Apple, Microsoft (MSFT), Amazon, Alphabet (GOOGL), and Facebook (FB) have risen because the businesses are growing far more than most, and investors know that bigger is better in today’s world.”

“Some retail investors, starved for something to bet on in the absence of professional sports, have turned their attention to stocks.”

“At the same time, near-zero interest rates have encouraged investors to pay up for growth, while some retail investors, starved for something to bet on in the absence of professional sports, have turned their attention to stocks, trading through online brokers like it’s 1999.”

“As a result, Apple, Amazon, Microsoft, Alphabet, and Facebook now account for nearly a quarter of the value of the S&P 500 index, a level of concentration rarely seen in the benchmark. And that might understate the influence of Big Tech. Add Amazon and the S&P Information Technology and Communication Services sectors constitute 45% of the benchmark index, according to J.P. Morgan data, compared with 40% during the dot-com bubble.”

“Even as the biggest tech names have seen market caps swell, some formerly small companies have graduated to the big leagues. Zoom, for one, jumped 41% in a single day after reporting sales that more than quadrupled the previous year’s, a consequence of the video service’s widespread adoption beyond a business audience. Zoom stock, having zoomed 465% in 2020, is now worth more than $100 billion. Peloton has a market cap of $25 billion after gaining 209% this year, as its stationary bikes replaced gym memberships.”

“Zoom trades for 50 times 2020 sales, and Peloton, 9.3 times. Both are priced as if future growth is unlimited—a risky bet, especially if the postvirus world looks not all that different from the previrus world.”

The Fed has pumped trillions of dollars into the economy

“Behind the scenes, meanwhile, the Fed is operating the bubble-making machinery. It has pumped trillions of dollars into the economy, expanding its own balance sheet to more than $7 trillion from $4.1 trillion at the start of 2020. This time around, its asset purchases have included not only Treasuries and mortgage-backed securities but also investment-grade and high-yield bonds. All of this demand has served to lower interest rates to near zero.”

“The Fed typically has burst past bubbles, including the dot-com bubble of the late 1990s and the housing bubble of the mid-2000s, by raising interest rates. Don’t count on that now, or at least not yet. Fed Chairman Jerome Powell has effectively promised to keep rates low for years, which means there should be plenty of cash sloshing around to keep the bubble growing.”

“Perhaps the biggest reason to keep betting on tech—and the stock market—is that things aren’t nearly as frothy now as they were during, say, the dot-com bubble. Even in August, the market never reached the sustained frenzy that characterized the late 1990s, when the major indexes went parabolic and stayed that way for months, says Katie Stockton, managing partner of Fairlead Strategies. Stockton thinks the market’s recent pullback will create another buying opportunity, “A bubble would be characterized by prolonged upside momentum,” she says. “The market doesn’t have that.””

To read more: https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?st=zdbk5yoalgbsduv

Source: https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?st=zdbk5yoalgbsduv

Top Americans by Wealth own Most of U.S. Equity Stocks

Posted on by

Top 10% of Americans by wealth own 87% of all U.S. equity stocks

The top 10% of Americans by wealth owned 87% of all stock outstanding in the first quarter, according to research from the Federal Reserve. That share has grown over the past decade, from 82.4% in 2009.  Fed researchers say the increase in wealth among the top 10% is largely a result of that cohort obtaining a larger concentration of assets. These increases were mirrored by decreases for households in the 50-90th percentiles of the wealth distribution,” Fed researchers said.

The percentage of Americans who own stock, either directly or through retirement or mutual funds, is falling. It most recently stood at about 55%, according to an April Gallup poll, down from a high of 67% in 2002.

“The middle class has essentially been left out of the stock market surge,” said Edward Wolff, an economics professor at New York University. “The rich have taken off from the rest of society.”

S&P 500 and NASDAQ indexes have closed at all time highs

The S&P 500 and NASDAQ have soared to a new high, wiping out its losses since the worst of the coronavirus-induced downturn in March. Stocks continue to shrug off historic unemployment rates and other economic warning signs.

The S&P 500, the benchmark U.S. stock index, has surged more than 50% since bottoming in March and is back at record levels, largely thanks to the unprecedented stimulus programs enacted by the Federal Reserve and Congress.

Although the stock market has erased its losses suffered during the pandemic, the economy appears to be telling a different story. It contracted at the sharpest rate on record in the second quarter, and the unemployment rate remained above 10% in July, after reaching nearly 15% in April.

The current disconnect between the stock market and the economy is extremely unusual.  The economy is not confirming the stock market’s strength. The stock market has surged since March 2020 lows, with the S&P 500 and NASDAQ indexes eclipsing all time highs in August 2020.

FOMC acknowledged that after the initial surge in job losses and plunge in economic activity, things have started to improve. According to the statement, “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.”

U.S. Economy and Stock Markets are Highly Disconnected

Posted on by

“The stock market isn’t the economy. The economy is production and jobs, and there are shortfalls in virtually every sector of the economy.”  -Janet Yellen, former Chair of the Federal Reserve

We remain in the midst of a global crisis as the impact of COVID-19 infections continues to spread. As a result, we are experiencing an income crisis for a wide swath of the working population. The labor market decline was most catastrophic on low-end age earners. Those jobs have been the slowest to recover and many of those jobs have been loss permanently.

financial markets reflect assessments of the value of assets today based on investors’ expectations for the cash those assets will generate.

The U.S. economy is highly consumer-driven according to economists; our Gross Domestic Product (GDP) levels are guided primarily by consumer spending. The “V-shaped” recovery in retail sales data has been a boon to the bull market narrative. There is, however, legitimate concern over the potential impact if the Congress and Executive branch are unable to hammer out a compromise on extended unemployment benefits.

Causes of the disconnect

“Financial markets reflect assessments of the value of assets today based on investors’ expectations for the cash those assets will generate.” Vanguard Investments

Hope-ism and federal intervention are buoying up the stock market. “Hope-ism” is the wishful thinking that makes investors believe that the economy will not only recover quickly, it will snap back with vigor as the virus is quickly vanquished.

Federal intervention has been stratospheric over the past decade plus. Coming into the pandemic, the Fed had injected $5 trillion in Quantitative Easing (QE) from the 2008 recession. Now it has added another $3 trillion in the first round of COVID-19 relief and will likely add at least another $2 trillion, bringing the total to a whopping $10 trillion.

The two, the U.S. economy and equity stock markets, will reconnect again. Either the economy will recover, as the stock market predicts, or the stock market will reprice and crash. In the following we discuss the causes of the disconnect and what investors should be concerned about as the disconnect corrects.

Investors should expect a stock market correction. Greed will give way to fear. FOMO (fear of missing out) will become FOLO (fear of losing out). Also, there are plenty of other threats to the economy and stock market including a global debt crisis, cyber crime and terrorism, trade wars and socioeconomic unrest.

References:

  1. https://www.marketwatch.com/articles/the-disturbing-reality-fueling-this-bull-market-51598004009?mod=mw_more_headlines
  2. https://seekingalpha.com/article/4368901-stock-market-will-reconnect-economy-what#:~:text=There%20are%20two%20reasons%20that%20the%20stock%20market,other%20way%20to%20reconnect%20is%20a%20market%20crash.
  3. https://www.barchart.com/story/options/146523/inside-volatility-trading-august-25-2020

Most explosive stock market rally in history

Posted on by

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.

Sources: CNBC and Fox Business News

3 tips to avoid locking in losses | Mass Mutual

Posted on by

By Allen Wastler
Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Posted on Apr 13, 2020

After a huge market downturn and a major loss of value in your investment portfolio, the temptation to do something — anything — may be hard to resist.

But in many ways, the best action may be to take no action. Why? An investment plan is a long-term project and making changes to it based on short-term considerations is often ill-advised. That’s why financial professionals encourage people to stay calm during market sell-offs and think about long-term objectives.

“It is a tough and scary time, and not locking in losses by panic selling is critical,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri.

But even if you did resist the initial impulse to flee during a market retreat, you still need to keep some discipline about your portfolio as you wait for a market recovery. Here are some traps to avoid….Read more: Avoid Locking in Losses

Markets, as a whole, have historically bounced back from downturns with time, as the following chart illustrates.

Source: Bloomberg. The S&P 500 is an equity index that consists of the stocks of 500 large U.S. companies measured by market capitalization. The results here include the effect of reinvested dividends. You cannot invest directly in an index.

It’s best to be invested.

Posted on by

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.