Should I Move My Investments to Fixed Income, Dividend-Paying Stocks, or Cash?

October 30, 2017

You may be looking at the stock market and asking where you should put your money. You might think the market is overheated and want to move to cash. You may be nearing retirement and feel like you should move to fixed income or bond-type investments. Perhaps you’ve heard us talking about dividend-paying stocks and wonder if that is an option for you. Like many investing questions, you should start by thinking about what you’re trying to accomplish.

If you are planning to buy a house, or have a child going to college, you will probably need short-term cash. By short-term, we mean less than the next three years. This may be a good time to accumulate some cash. The market can be volatile and you don’t want to sell during a market dip just because you need cash in the short-term.

If you’re trying to time the market, our standard answer is don’t try. We’ve looked at historical data and in many cases realized we would have lost more money if we traded on foreknowledge of events. We can even go back to the tragic events of 9/11. If you had known on September 10 that the Terrorist Attacks were going to happen, you might have liquidated your accounts and gone to cash. Well, on September 10th of 2001 we were up about 5 percent for the year in our TPS newsletter portfolio. On December 31st of 2001 we were up 19 percent. So had we known that 9/11 was going to occur, and had we gone to cash right before the Attacks, we would have locked in a 5 percent return. But we didn’t. We didn’t know it was going to happen, so we rode through. The markets reopened after 9/11, and stocks went down of course. But then stocks recovered.

But what about fixed income or bonds? The answers from 30 years ago aren’t the same as the answers today. It is a different market with different yields. Chris Creed recently sat down for an interview to answer the questions below. You can click on the questions below and it will take you to his answers.

Is fixed income a good place to put money?

Do the interest rates support the idea of a bear market?

How do dividend-paying stocks benefit you in a down market?

What percentage of AFAM’s portfolios are dividend-paying stocks?

Is fixed income a good place to put money?

“It depends” is the correct answer. If you’re looking at it as a long-term investor seeking capital appreciation, I would say the answer is probably no. People have had declining yields for the last 30 or so years. You probably remember in your lifetime savings rates of five, six percent. You hear people talk about the mortgages they paid 17 percent on. The CDs they got at the bank were paying 15 percent. So you compare that 15 percent CD people got in the late 70s or early 80s to the CDs now. If they got a one percent CD right now they’d actually put ads in the newspaper about the one percent CD rates. So that’s a good proxy for fixed income in general. Meaning that fixed income yields are substantially lower right now than back then. However, if you are wanting to diversify beyond the stock market, fixed income investments might make sense for a portion of your portfolio. Bear in mind that in general, the longer the maturity, the more sensitive to interest rate changes.

Do the interest rates support the idea of a bear market?

Look at it at two levels. Let’s say you have $100,000 in the stock market, and you’re a little bit spooked about the stock market. Let’s say you’re back in the year 2000. You’re looking at the stock market and you’re saying, “This seems toppy to me, I’m very nervous. I’m just going to move my money to a money market.” Well your money market pays you five percent. So when you sit down with your wife and you say, “Hey honey, look I know we’ve made a ton of money in the stock market, but right now I’m going to move my money to this money market.” She’d say, “Well are we going to get any return on our money while it’s sitting there?” “Not very much. We’re going to get five percent.” “Okay. So on your $100,000, you’re going to get $5,000 a year. Okay, I can think of worse things.”

Let’s move that same conversation to now. “Honey this $100,000 that’s in the stock market, I feel nervous about it, we’re going to move it out to a money market.” “Oh really? Well what is the interest rate we’re going to get on that money market?” “Half of one percent.” So you’re going to get $500 on your $100,000 of investment every year. That alternative we call TINA – there is no alternative. There’s just not an alternative in fixed income money to compensate for the opportunity cost of not investing in the stock market. Don’t forget that dividends paid on $100,000, on average, are currently getting you around two percent. So your $100,000 is going to give you $2,000 instead of $500, even if it does nothing. As long-term investors, we believe that if it goes down, it will likely come back up again.

How do dividend-paying stocks benefit you in a down market?

Dividend stocks can act as a buffer that may add a little resilience to a portfolio. They may also give you cash when the stock market goes down. If those companies continue to pay dividends, you’ve got more cash to buy more shares of the companies that have fallen down, or other companies that have become bargains. A simplistic way to look at it is this – value stocks have historically outperformed growth stocks, and dividend payers have historically outperformed non-dividend payers over the long-term. So we invest in value stocks that pay dividends.

What percentage of AFAM’s portfolios are dividend-paying stocks?

In both our Prudent Speculator portfolio and our Select Value portfolio, about 90 percent of the companies currently pay dividends. Then we’ve got three other portfolios that are solely dividend focused. In those, all of the companies currently pay dividends.

The Case for Value Investing

We believe that you pre-pay for expectations in growth stocks, whereas value stocks have already been discounted. This is why over the long-term, growth stocks have trailed value stocks, returning an annualized average of 9.4% while value stocks have returned an annualized average of 13.6% over the same time period.

Download The Case for Value Investing

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Nothing presented herein is, or is intended to constitute, investment advice, nor sales material, and no investment decision should be made based on any information provided herein. The information provided herein is educational in nature, is not individualized, and is not intended to serve as the primary basis for your retirement, investment, or tax-planning decisions.

Investing involves risk, principal loss is possible, and there can be no assurance that investment objectives will be achieved. The information presented herein is for discussion and illustrative purposes only and does not constitute investment advice. It is not a recommendation or an offer or solicitation to buy or sell any securities.

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