Co-produced with Treading Softly
As income investors, we diligently work to uncover the best dividend opportunities that meet our criteria as value-focused income investors. In short, we use our proprietary Income Method to approach the market in a way that does not require constant trading, gamification, or gambling.
As the market whipsaws, we’ve seen an uptick in the desire to become a stay-at-home day trader among investors we’ve spoken to. They point to the success of others and say “look at that trade!”
Jealousy and envy are often the weights that lead to an investor’s demise. You need to keep a long-term view to remain solidly an investor and not a trading gambler.
We help our members do this by providing regular market updates, macro-economic insights, and educational reports to help flesh them out as well-rounded investors.
The State of the Economy
The US unemployment figures that came out on Sept. 4 reported the rate falling to 8.4% for August from 10.2% in July. It was a nice surprise as economists expected it to be at 9.8%. This shows that the US economy is still resilient despite the ongoing impact of the pandemic. Following the news, we saw some notable strength in residential REITs (VNQ) and mortgage REITs (REM), two sectors we have been bullish on, while technology stocks (XLK) have taken most of the hit.
Having said that, there are many positives to look for:
- The US economy is clearly improving better than expected.
- We remain in a strong uptrend market despite the last days’ weakness.
- Importantly, investors are eager to buy more equities. Today, there’s tons of cash sitting on the sidelines and invested in CDs and Treasuries. With the current low-interest rates, these investors have been penalized because they are earning next to nothing in interest. At each and every pullback, it has been a chance for investors to “buy the dip.” This has created a certain amount of psychological support for investors.
In the short run, we can expect some “window dressing” this month as September marks an end-of-quarter month. Fund managers want to show their clients that they are fully invested and that they are holding some good stocks on their books. So a fair amount of stock buying tends to happen in the last 10 days of September which would result in additional support for the markets.
Are the Markets Disconnected from Reality?
I have seen some of our readers arguing that the markets are disconnected from reality, but this has not prevented the markets to strongly recover from the March crash. This disconnection is the result of plenty of liquidity, very low interest rates, and with investors sitting on large amounts of cash on the sideline invested in low-yielding CDs and Treasuries. A good portion of that money will find its way to equities from now until the end of 2021. Couple that with record-low interest rates, I’m very optimistic on the markets for the next two years. The other factor in play here is that the markets are forward looking. The economy is weaker right now, but we’ll be out of this COVID-19 mess eventually and can get on with our lives, or learn to live with it. The best proof here is the strong employment numbers we saw in July. The economy is moving forward, with or without the pandemic.
Furthermore, with many working at home and using technology to their advantage, productivity is improving. Corporate America is seeing their profit margins grow and expenses reduced. I expect this trend to continue with more cash flows being produced by many companies. This is a trend that’s set to accelerate. As profits increase, the markets suddenly will not look that expensive.
What should you be doing now?
Plug Your Brain In
Armed with the knowledge that the markets are whipsawing (in consolidation mode) and that technology stocks have taken the brunt of the pain, it’s time to get your brain engaged and tell your heart to hit the bench.
The average investor underperforms the general market because their emotions get the best of them. Flying high on the exuberance of the success of technology and growth-oriented investments many investors came crashing back to earth during this month. The Nasdaq (QQQ), being tech heavy, led the fall.
Some like Icarus thought that there was no bound to their flight range – gravity often disagrees. Unrealized gains can vanish as quickly as they appear, leaving little but timing the market as a hallmark of success. We don’t like to gamble like this.
So what retirees and income investors need to do is get their brain engaged and recognize that chasing the mirage of success of others does not mesh with the reality of their methodology.
Wavey Charts Are a Friend of Income Investors
Long-term investors for income will often love a range-bound security. Why? Because we’re not beholden to the belief that our underlying investment must rapidly appreciate in value to benefit us. The ability to reinvest at equal yield to grow our income stream is what makes an investment mouth watering.
Consider Realty Income (O), currently it yields 4.8%. Ten years ago it traded for $33.71 (9/13/2010 price). Here’s the performance over 10 years:
$10,000 invested in O would be worth $19,470 now. However, when you factor in dividends you get to $30,790. So $10,000 would’ve provided an annual dividend of $513. Now your $30,790 worth of stock produces $1,320.89 in dividends. You’ve almost tripled your income stream simply by holding and investing your dividends in a stock that has “lagged” the market in the opinion of many authors.
They look for rapid climbers and the next Amazon (AMZN). We simply want a reliable payer at an excellent price.
Pick Your Plays Wisely
I would be remiss if I left you thinking that we only invest in whipsawing range-bound securities. We don’t – they do not bother us over a long span of time as it enables successful reinvestment.
The recent market rally has largely been confined to technology names, likewise the drop impacted them heavily as well. Meanwhile, property REITs have flown under the radar. This will be a sector where not only fantastic opportunities abound but also we should see outperformance moving toward the year’s end.
Government allowed forbearance and disallowed evictions have not heavily impacted high-quality REITs in solid markets. We have been highlighting such REITs, especially in the residential property REIT sub-sector that are amazing opportunities. Investors are wise to see the macro-economic conditions and adjust their allocations or new investment dollars to maximize their benefit moving forward.
Conclusion: Know the Process? Follow the Process
Know where the market is heading and the global forces at play – then continue to follow the process within our Income Method. You don’t need to win the race and finish miles ahead of everyone else to succeed. You need to know your goals, have your process and stop chasing after others.
Find great dividend payers at an outstanding price. Reinvest dividends to keep your income stream growing. Watch the horizon for storms and prepare accordingly. Invest knowing which sectors are going to benefit from the current conditions to maximize your returns. Buying the right dividend stocks and re-investing dividends received will boost your income during turbulent markets. This is what smart income investors do.
You can do this. If you need help, High Dividend Opportunities stands ready with six experts to help you find your way and help you stay on the straight and narrow.
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Disclosure: I am/we are long O, REM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities.