Dividend-related Investing in Tough Economic Times

I had a friend ask me on how they should spend money in the stock market with its recent ups and downs. Although I cannot give exact recommendations for which companies to invest in, here is some information on one investment strategy for those who are looking for deals in the stock market and can afford to invest.

On the one hand, it is reasonable to think that public companies should take the capital they raise from selling stock and reinvest it back entirely.

However, the reality is that a significant portion of that money often ends up as waste due to failed business decisions such as unsuccessful product launches, bad acquisitions etc’. On the other hand, businesses that consistently pay and increase their dividends through time are often regarded as more fiscally and operationally responsible than companies that don’t pay any dividends.

Companies that offer dividends are showing a level of confidence that their operations can meet financial goals, and confidence is the key attribute that investors look for, especially in turbulent economic times. Dividends also cannot be concocted by some accounting measure, which allows investors to conclude that the company’s earnings are legitimate.

Additionally, in most cases, companies cannot keep growing since any marketplace does have its limits. Therefore, instead of expanding into other non-related products and markets, it’s more worthwhile for a company to pay out dividends. All this is in keeping with the key for a long term success for a company, that of being able to balance the needs of shareholders, management, and the enterprise.

There is a general misconception about dividend stocks that they can be “boring” or simply don’t perform as well as non-dividend stocks. Ned Davis Research shows a good representation of how dividend paying stocks have outperformed non-dividend paying stocks over the past 35 years, which includes 4 prior recessions.

Combine this information with the fact that many stocks of high-quality dividend-paying companies have recently reached historically low prices and you may keep this in mind an investment strategy for the foreseeable future.

How Can Warren Buffett Keep Getting Richer?

The world’s richest man, Warren Buffett, is also the most famous stock investor. During the latest financial crisis, and previous ones, he hasn’t panicked but actually did the reverse. He invested big and for the long term.

Buffett’s company, Berkshire Hathaway, is a far-reaching worldwide empire that owns businesses in diverse industries from insurance to furniture, jewelry to candy and Dairy Queen ice cream shops. Starting from 2004 onwards, Berkshire Hathaway had approximately $44 billion in cash. For those 4 years, Buffett decided to sit on this enormous amount of cash and wait for the right opportunities to come along.

Well, the best opportunity is the current economic meltdown.

Buffett termed the current crisis an “economic Pearl Harbor”. He also stated, “In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are now.” Although arguably true, this is not to say that Buffett was entirely pessimistic.

Earlier this year, Buffett invested $6.5 billion into the candy company MARS in order to acquire the gum company Wrigley, among other deals. Since the latest crisis, Buffett invested in the following:

– $4.7 billion to acquire Constellation Energy, an electricity and natural gas distributor.
– $5 billion stake in Goldman Sachs’ preferred stocks.
– $3 billion stake in General Electric in preferred stocks.

When Buffett made the above investment deals, he was offering much more than straight capital. He was also lending his credibility, which means that Goldman and General Electric were willing to grant him great deals based on the hope that his name alone would stabilize their stock prices for the foreseeable future.

It’s important to keep in mind, however, that Buffett got sweetheart deals which are likely to provide substantial returns on his investments, but other investors cannot get. Instead of buying what Warren Buffet is purchasing these days, it’s better to learn from his overall strategy:

– Assemble a list of attractive businesses
– Invest for life

Buffett hasn’t freaked out during these turbulent financial times, and he hasn’t attempted to make a quick buck. Instead, he is investing for the long term. This is the same strategy that he consistently followed for decades. Wait for the opportunities and strike hard when the iron is hot. When the opportunity is right, the negotiation is much easier and he can get a share of the companies, or the entire companies, at a great price.

As Buffett did, it’s essential to conduct a complete market/company research before the opportunity appears. This is important in order to remove the emotional aspect of investing. Therefore, compile a list of companies that you wish to own for the long term, combined with the prices you wish to pay for them. Regularly check the market value of these firms and whether the business environment has changed since you first added them to your list. Then make your move and keep these stocks for the long term.

Why Many Investors Should Stay in the Market?

This post is intended for individual investors who are 10 or more years away from retirement.

With the recent downturn in the financial markets, many investors are wary of their shrinking investment accounts. As an example, retirement account have been estimated to have lost more than $2 trillion dollars during the last 15 months. Having said that, every smart investment advisor I have heard urges investors with 10+ years before their retirement not to panic and remain steadfast with their investments.

Currently, investments of the last few years have most likely lost their value, but investors who regularly contribute to their portfolio are buying in at a low point. Although the market could fall further, the ongoing investments would buy in at the lower points too. This is known as dollar cost averaging and has been shown to work even during the Great Depression. For those who believe that the stock market will recover at some point, and every expert does, then buying in at a low point is basic common sense.

Another point to make is that absolutely no person knows when the stock markets will reach a bottom and moderate recoveries do occur just as quick as a crash. Whether they will recover to their historic highs in the near future is unlikely, but further down the road they should. At any rate, holding on a disproportionate amounts of cash instead of investing it is not the wisest and profitable investment for the long term, in any economic environment.

What many investors are doing now is to cash out their stock assets due to fear of additional market drops. This is only logical if the cash is needed for an emergency purpose or if the stocks of a given company do truly show signs of being a bad investment. For long term investors, with a diversified portfolio, panic is unwarranted. What is warranted is to be educated about investing, and I am personally upset at most news anchors on TV who know very little about economics and are exuding fear and sometimes outright panic in their broadcasts.

It has been historically shown that short term investors tend to have lower returns than long term investors. This is due to such investors who sell their stocks at low points and buy later at higher points, as an emotional response. Therefore, although currently the nest egg is shrinking, history is a good teacher in showing that long term investments is the most prudent approach.

It’s also a good idea to diversify ones investments since essentially every asset class has fallen in value. Diversification into real estate, dividend paying stocks, commodoties, or bonds is advisable. The objective is to have a well balanced portfolio that the investor actually understands and to be patient until the market upheaval is over.