Not too long ago, my savings account was paying 5-per-cent interest and blue chips stocks were providing about a 2.5-per-cent dividend. Now, my savings account is paying 0.5-per-cent interest, but blue chips stocks are providing about a 4-per-cent dividend. Should I worry?
The flip flop of interest rates, where the higher rate used to be fixed income instruments versus stocks, certainly has impacted many investors.
Long ago, people retired with the expectation that they would get 5 per cent from bonds and GICs and security of their principal. During those times, it was typical that to help guide asset mix the rule of thumb was 100 less your age was your equity exposure.
Now that the yield on fixed income and savings accounts doesn’t even pay enough to keep up with inflation at 2 per cent, that rule of thumb has for me, as an adviser, has gone out the window. If you are not getting at least the 2 per cent, you are effectively losing money because you are losing the buying power of your dollar. As an investment adviser, my primary goal is to not lose you money.
As a result, investors have few alternatives to get a better than 2-per-cent return. If you can’t get it from bonds and such, the other choice is investing in stocks. When doing so you need to evaluate some primary features of a stock. They would be the answers to questions such as, what is the current dividend yield? Has the company ever reduced the dividend payout? Has it increased it in the past? What is the revenue or cash flow to support the payout of the dividend? What has the underlying stock price performance been like? Is it increasing, on a downward trend or with high volatility?
As a result of investing in primarily equity stocks one’s portfolio may have a much higher equity weighting than in the past. In this case, you need to invest in high quality blue-chip companies that the fear of them becoming de-listed is very low. Yes, you may experience a temporary downturn of the underlying stock price, but as long as you have the dividend payout that is what is important. If there is something fundamental that has changed with the company to cause concern then you may have to consider selling that stock. The key is not to panic but to know what you own.
I often give the comparison to owning an investment property. Let’s say you rent out a property and the tenants consistently pay you the rent on time. The real estate market has a downturn and values drop 5 per cent. As long as the property doesn’t suffer faults, like a crack in the foundation, you would not rush to sell that property. You just collect the rent. Owning a stock is similar.
If you are a well-informed investor there should be no cause for worry.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can also send your questions to email@example.com.
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