The comment stream is asking you to elaborate as to that portion of your statement wherein you said owning 'dividend growers exclusively' is risky or not advisable...exactly what are the dangers of having an income stream as a primary goal instead of capital appreciation?
My answer;
I have tried to address this before. This is in part a philosophical issue. My first hand experience with capital markets goes back to 1984 (worked in the industry for a year before starting college) and I have tried to learn about stock market history from before 1984.
In my time I have seen plenty of things that could never blowup or otherwise hurt people in fact go on to blowup and otherwise hurt people. I believe you are around 70 but I do not know how long you have been a market participant but you have probably seen more of this first hand than I have.
For whatever reason I have a pretty good memory for how the psychology around these things has worked and I believe I see a lot of the same behavior repeating in many of the comments.
It may be difficult to believe but the can't go wrong idea was also applied to the Nifty 50 and Junk Bonds--yes, you can say it was different for this or that but the behavior is not different. In the 1990s Fannie and Freddie were must holds because of how incredibly safe they were.
It is simply a matter of philosophy based on personal observation that too much of anything, ANYTHING, increases the risk taken. The debate that we all have is actually not whether the risk is greater (IMO) but whether or not there will ever be a consequence for that risk and for that, I have no idea. I do know that some event that I can't imagine that somehow does blow up whatever segment of dividend stocks you care about won't blow up our clients.
Frankly I would be more concerned about the blowup I CAN'T envision as opposed to the one I can envision.
My own preference is to be segment agnostic (so dividend stocks would be one segment, for example). There are many segments in the market, they all rotate in and out of favor and occasionally something truly awful happens to some stray market segment. Something truly awful could happen to any segment. This is of course improbable but it is not impossible. The individual consequence of "truly awful" depends on the amount of exposure in the portfolio.
I don't think you all see it this way but I think my comments in this thread over the last couple of years have been ones of moderation.
7 comments:
My portfolio has to survive for 40+ years. It is designed so: no single stock, no sector, no asset class, and no country can kill it by going to zero (which they seem to do regularly). Having too many dividend paying stocks, no matter how good they look, would violate the asset class rule. How many railroads with safe 5% bonds went under in the late 1800's? How many saw their fortunes dwindle with AT&T, LILCO, Texaco, or Beth Steel, all solid dividend payers? TEPCO paid out beautiful 2-3% dividends for years until 2010, in addition to the capital losses. To me, history does not support the idea of living off of dividends.
Rich
Re: 7:57
Those who watched their fortunes dwindle with those companies likely made the mistake of loading up on them at the expense of diversification.
I use dividend stocks in our portfolio to provide some reliable income, regardless of the daily actions of the stock market.
But, as Roger preaches, all things in moderation. The dividend-stock portion of the portfolio amounts to about 15 percent of the total portfolio. The remainder is in equity and bond funds and some cash.
The dividend-stock portion is invested in approximately 30 companies, spread across and within industry sectors. The largest single-stock position amounts to 0.99 percent of the total portfolio. I believe that helps reduce the damaging impact of sector and company-specific "blow-ups."
All investment options carry risk, even cash. The key is to understand those risks and respond accordingly.
And responding accordingly also means understanding you are investing in a company, not a stock certificate. So you monitor the company and its industry's performance with a critical eye. Many of those who watched their fortunes dwindle likely failed to do that, also.
Roger, with the balanced portfolio you advocate with a dividend stream that is inadequate for living on, one presumably systematically sells portions of the portfolio as he goes through his retirement years. How do you decide which stocks to sell for a given year? Thanks.
All the more reason to use passive investment methods.
10:42,
It is a very rare occasion that dividends and interest don't cover a normal monthly or quarterly distribution.
In managing the portfolio it may not be necessary to sell down a position that grows from 3% up to 4% but if needed to meet a distribution it is an easy place to look.
Since no one knows anyones else's life or financial situation, it makes perfect sense for unknown internet poster to dictate exactly how others should invest...
Y'all should be in Congress.
David Swensen, chief executive officer of Yale University's $19.4 billion endowment, said mutual funds value profit-taking over fiduciary responsibility and most investors are better served investing in index funds. Unless an investor has access to "incredibly high- qualified professionals," they "should be 100 percent passive -- that includes almost all individual investors and most institutional investors," he said.
Read about it here:
http://bit.ly/Aa6TU5
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