Despite a bout of weakness at the start, September ended up being a big month. Not only did the Fed cut rates, but the size – 50 basis points – indicates a confidence that inflation has been brought under control. The Fed clearly has a desire to keep economic growth strong.
We also saw the Dow handily blow through 40,000 and reach high enough that those of us who pay attention to such things can’t help but wonder how long until Dow 50,000.
October has continued that trend, with the S&P 500 joining the Dow at all-time highs and the Nasdaq within striking distance (depending on when you read this).
As is often the case when things like this happen, the markets can get a little frothy, so there could be a correction in the near future, but it doesn’t seem likely to be too bad.
One sign of that frothiness is pundits saying silly things, so beware.
In September I read an article entitled “Rich, Young Americans Are Ditching the Stormy Stock Market” which discussed alternative assets. While the article says the stock market has long been the go-to choice for investors, and that the likes of Warren Buffett, Elon Musk, and Jeff Bezos have the majority of their wealth in stocks, it goes on to say that individuals between the ages of 21 and 43 with at least $3 million in assets only have 25% in stocks.
Instead, these people have their money in real estate, private equity investing, cryptocurrencies, gold, and art.
This is NOT an asset allocation I would recommend.
These young rich people can likely afford to take greater (stupid?) risk because they have a long time to recover from weak financial moves. And I’m guessing they have access to safety nets most people don’t. I’m not saying there isn’t money to be made in some of those areas, but they can all be high risk.
While any of these areas can be part of your portfolio, I would strongly recommend against having even a substantial minority of your assets in those buckets. There is a reason why stocks and bonds have been the assets of choice for most investors. Don’t be sucked in by writers who need to come up with a “fresh angle” for an article.
Speaking of sticking with what works well, today I want to talk about dividend stocks.
Let’s face it, in the world of investing, growth investing is the sexy area that gets most of the headlines. Value and dividend investing tend to seem a little sleepier by comparison. But if profits are what you’re looking for, never discount dividend investing. Stocks that consistently pay dividends, particularly growing dividends, historically are among the best investments you can make in the stock market.
And dividend stocks can provide in multiple ways. Just because a stock pays dividends doesn’t mean you can’t also expect asset appreciation as well. It is fair to say that generally, dividend stocks aren’t the ones that have 50%, 100%, 250% growth in a six-month period (although a handful have certainly been challenging that notion this year).
But a good dividend stock does see solid long-term gains in many cases. Of course, sector rotations can cause ups and downs in price that you can ride if you play them right.
Strong dividends combined with a dividend reinvestment plan (DRIP) can produce very nice capital appreciation as well.
I had the opportunity to see Tom Hutchison, Chief Analyst of the Cabot Dividend Investor, address an audience at a conference that skewed towards growth investing. The body language in the room as Tom took the stage could be politely described as “indifferent.” People had their phones out checking emails or were leaning back in the chairs, wondering if this would be a good time to go get more coffee.
But as Tom spoke about dividend investing, its historical overperformance, and the current opportunities, his passion shone through. The audience took notice. The phones were put away, attendees were leaning forward on the edge of their seats, taking notes, and the Q&A time was not enough to get to the many hands that went up from people wanting to ask him questions.
Who doesn’t love being able to say they bought Amazon or Apple at 14? Those massive growth stock winners can be enormously exciting and ego-gratifying. But they don’t come along every day, and let’s face it – you have to kiss a lot of frogs before you find a prince. Dividend stocks, particularly those with long histories of dividend payments and, ideally, growing dividends, have also made a lot of people a lot of money, and with a lot less volatility and risk. I don’t know about you, but I think that’s pretty cool too.
The market is nearing the end of a second strong year of growth, but investor sentiment is still a little soft. For some reason, many investors remain more cautious than the market warrants. If that includes you, I strongly suggest you look at dividend stocks as a lower-risk way to play the market.
If you’re already highly comfortable and investing, recent developments have created new opportunities for growth, but dividends can still have a place in your portfolio. Either way, there are dividend opportunities, and right now Tom is particularly bullish on utilities and real estate.
