I was talking to a friend of mine last day, he was asking me what do I think (oh wait do I think?!? 🙂 ) about the recent market correction that rocked the last couple of weeks for us investors/traders.
I cannot comment too much on the actual events, they are under they eyes of the population, but I did try to explain what was my approach to the market and the strategy in investing that I follow.
In the end I do believe that strategy is all we’ve got, success depends greatly on how well you execute it and of course if the strategy is a good one. I kept telling him that I set a target for the dividends that I get, regardless of market evaluations and the likes.
Right now I have been working quite solidly to restrict the number of stocks that I have in the PF, and at the same time to ensure a net “theoretical” dividend return of at least 2%.
Right now I pay close to 40% taxes (average) on 80% of my dividends, so the actual gross potential return is more toward 4%.
I write potential because I keep adding into the stocks during the year, so at the end of the year depending on when the stock was added I might have a lower return as I might have missed the ex-dividend date.
Anyhow accountancy issues aside, this strategy forces me to invest in a lot of blue chip that “have to have” at least 3% yield, this means that I cannot play around a lot with the “up and coming” companies right now (SBUX, DIS just to name a few), because their yield is too low, and in the end taking into account currency risks and market risks it’s not worthy to focus in a company for a potential future yield, but for a very low actual contribution.
Going back to my friend he went “only 2%”?
And here we open a totally different chapter of the story. In Europe average inflation is about 2/2.5%. Now the rate is quite low and will probably be kept that way for a couple of more years, this means that I can get an “head start”on it if I am good at ensuring that dividends are 2% of invested capital.
In my view if I set a strategy that starts at 2% net return (whatever happens to the stocks), reinvesting these dividends (most of them are probably going to increase over time, but let’s assume that they stay where they are), I should beat both the saving accounts and inflation.
Of course if I was so good to pick all stocks that grow dividends a lot, the effect of compounding would be much bigger, but at this present time I need to ensure that the “basic rate” is there.
Everything will be much clearer at the end of the year when I will have most of the capital deployed and a clearer picture at where the Portfolio is heading.
And here I let the recent events come in, because I started last December I knew that I was entering in a very high market. The correction helped me to average down a lot of positions, and I guess that who managed to start before me has had similar experiences over the years, managing to have even lower stock prices (hence potential higher stock values gains).
On my Rules of Engagement, I have added a new item: 10% of the dividends must be stored away for a “correction fund”, that can be deployed only after a market collapse (where normally bargains are to be found).
In the end my friend thinks that a 2% return is too low, much better put all the money in the insurance policies that return a 3/4%. I am not a great advocate of those instruments, as the money is blocked there for a long time and if you need it it’s quite painful to disinvest. I like to think that “whatever the weather” (whatever the actual result) I can sell everything and run away with the money if I need to 🙂
Almost 1 year into investing in dividend and still finding out lots of new things/ideas. It’s a good feeling, because despite not so great results (at the moment) I can see where the boat is heading and given a bit of time the sun will come.
And you out there? How is it working out for you? (You are probably already on the beach with your Margaritas getting tanned! 🙂 )