Welcome to the end of the week! Just sit back, relax, and enjoy this weeks roundup in another edition of Happy Hour.
High Priced Dividends
Show me someone who invests for income and I’ll show someone overpaying for dividend stocks. Dividend investing is a popular pastime for many investors. The idea of getting paid while you wait is a big seller.
To that end, it works best when the stocks are cheapest. A double whammy. You lock in higher yields while you capture capital gains. Reinvest it and it’s compounding at its best.
But like every strategy it doesn’t work all the time. When prices rise, yields on dividend stocks fall. Sometimes companies can’t increase the dividend fast enough. Demand outpaces company growth and dividend growth.
But it’s okay, it pays dividends right? Dividend stocks are safer than regular stocks? Wrong. With investing there’s an exception to every rule. Buying high-priced dividend stocks increases risk. When thinking like this persists, prices peak and eventually fall.
I covered this in the past. Same situation. Dividend stocks dance with interest rates (bond yields). When interest rates stay this low, this long, it’s bound to repeat itself several times over.
Here’s why.
Bond investors like income too.
When bond yields fall too low, bond investors look for ways to recoup that yield. They turn to higher risk bonds and dividend stocks. Money follows yield. Bond investors join the dividend party.
Everyone rejoices. Bond investors get yield. Dividend investors get yield and gains.
When this happens utilities,REITs, and other dividend funds do great. But now, dividend funds have added interest rate risk. Bond investors won’t stick around if/when interest rates rise. Money follows yield. And bond investors prefer bonds.
Don’t be surprised when dividend funds fall.
Last Call
- What Will You Do To Avoid Thinking? – Behavior Gap
- 5 High-Risk Behaviors Harmful to Your Retirement – Marketwatch
- How to Get Less Stupid at Investing – M. Housel
- How to Worry Less About Money – Brain Pickings
- Wall Street’s Worst-Case Scenario: A Run on Bonds – Businessweek
