Investing for Yield Instead of Total Return
Does anyone feel good about the stock market right now? If you do, would you please send me an e-mail?
Does anyone feel good about an income stream that rises at a rate faster than inflation, with a 96% chance of not declining?
As investors, we are sometimes maligned by our propensity to chase yield. We are traumatized by two crashes (Dot.com 2000 and Meltdown 2008). We are running around in circles. We are getting so creative in our pursuit of income that we have beaten up almost every other investment. I mean beaten and I mean up.
Bonds are paying next to nothing and recently German bonds joined the world's collection of NIRP (negative interest rate policy) countries. Want to guarantee only a small loss? Buy a German bond, where you have to pay the government for them to keep you from getting at your money. What is this craziness? We have beaten bonds prices up so much that their yields are now negative.
Real estate in the U.S. is at record highs and in Colorado many areas are acting as crazy as they did in 2006, before the mortgage crisis. The yields people are willing to accept on an investment that may, very likely, require surprising capital outflows to maintain, are approaching record lows again. We have seen this one before. We know how it ended.
During the four years after the crash, investors continued to pull money out of stocks and invest in anything that had a yield greater than (almost zero) bond yields. Many of these investments are struggling now: ones that are not traded on public markets, illiquid investments, alternatives, REITs, and limited partnerships are causing their owner's stomachaches. They may have bought these investments because the principle did not decrease with stocks, but now these investments' shelf lives may be coming up. Now the various regulations have changed, and some investors are seeing account statements reminiscent of stock market declines.
"No one should presume an asset is stable simply because an investor doesn't know its value," commented Craig McCann, former SEC economist and securities litigator(1).
Forgive us for forgetting this rule. Investments are made for the total return, not just the yield. As we enter retirement and want more income and less stress, we want to believe that we can have a steady account value with a high income. This is not the world we live in.
Stock dividends are historically stable and growing. Companies are 60% likely to increase dividends once they start paying them and 96% likely to not reduce them. When they are raised, they grow at an average of 6%, a rate that is faster than the long-term average rate of inflation. In other words, dividends may provide an income that maintains (or improves) our quality of life as we age. Historically, stock prices on average have grown faster than that(2).
If we have the courage to withstand price bounciness, we may enjoy a steady income from the very investments we've allowed ourselves to fear.
For more on this topic, read Dr. Tom Howard's white paper, Growing Income and Wealth With High-Dividend Equities. (Provided by a third-party source and is for educational purposes only.)
(2) Behavioral Portfolio Management by C. Thomas Howard, 2014. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2210032