Investors Are Coming Back to Reality
I hate to burst your bubble, but the joyride is over. It’s time to bring the car into the garage and deal with the repercussions. I’ve been pounding the table for weeks warning that it was going to happen.
The reaction to fourth-quarter earnings was a surreal experience for me. I watched investors get excited about numbers and news that I would call only slightly positive. And anything negative or uncertain got swept under the rug as though it didn’t matter.
However, the latest run of unchecked optimism might just be over.
I’ve talked about the CNN Fear and Greed Index before. It’s designed as a gauge of investor sentiment. I use it to help judge whether stocks are fairly priced. In periods of greed, we’ll find the markets are generally overpriced… when the mood turns to fear, the opposite will be true.
There are lots of ways that analysts can measure investor sentiment. I like CNN’s because it uses seven different indicators in its calculation. The gauge has been in the greed and extreme greed territory since November. Then earlier this month, it slid back to neutral… and then into fear.
Source: CNN
Two of the components in the index are sitting in extreme fear territory. I guess the first-quarter earnings numbers are sobering up investors. I’m always grateful not to get caught up in emotional investing in the first place.
Boring Is Better
Dividend stocks were not included in the market’s mad optimism. Of course not, they are too boring. That’s why I like them.
Another way to know if stocks are overpriced is the price-to-earnings (P/E) ratio. The P/E ratio of the S&P 500 climbed to 27.4 last month, while the S&P 500 High Dividend Index peaked at a P/E of just 18. In other words, investors are pricing S&P 500 stocks at an average of 27X their current yearly earnings, and just 18X for the High Dividend Index stocks.
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For some perspective, the historical average P/E for the S&P 500 is around 16.
I am often asked by colleagues and self-proclaimed investors: “Don’t you want the excitement of the market?” My answer ranges from “not really” to “absolutely not” depending on how engaged I want to get in a discussion.
The last thing I want to do with my free time is to sit in the house and watch the stock market.
Now, don’t take this too literally. It’s my job to know what’s going on in the markets and find the best dividend opportunities for my readers. But at the end of the day, if the price isn’t right, the dividend will be too low. And that’s not what we’re here for.
When I want to “time the market”—and I use that phrase loosely—I’m looking at periods of weeks or days, not hours and minutes. Being a successful dividend investor means not sitting at the computer all day looking for the exact time to buy or sell.
If I want some money excitement, I’ll head down to the casino.
Sure, I sometimes find dividend stocks with a little more risk. Generally, though, I want my investments to be boring and stable.
This mindset isn’t always easy to follow, especially when the markets are ripping to new highs like they’ve been doing recently. Rationally, I know that big and boring companies perform well over long periods of time—which is my goal and time frame. It reduces the stress of trying to time the market.
Our “Keep It Simple” Strategy
It starts with understanding that there are really only two things to do with your investible cash:
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Generate income streams right now.
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Build wealth for the future.
Depending on your current financial situation, you can adjust the percentage of money you put to work toward these two goals. When we talk about dividend investing, the difference between the two is whether you’re collecting your dividends or reinvesting them.
I divide my recommendations into Current Yield and Bedrock Income stocks that align with those goals. The first group generally has higher dividend yields to maximize your income streams. The second group is stocks you could hold for years or even decades. This makes them perfect for dividend reinvesting and supercharging your wealth building.
One of my favorite Bedrock Income stocks is Enterprise Products Partners (EPD). The company is a giant in the oil and natural gas pipeline business. No matter what energy prices are doing, EPD gets paid to move it from point A to point B. It currently pays a 7% annual yield with a P/E ratio of just 11.4.
One of my favorite Current Yield stocks is AT&T (T). I’m incredibly bullish on the future of telecoms. No matter what direction technology takes us, it’s going to require the transmission of tons of data. Telecoms are going to get a piece of this action. AT&T currently pays a 6.5% annual yield. And its P/E ratio is only 9.
In the end, it doesn’t matter if the overall market is fearful or greedy. If you can keep your investments rational and boring, you’ll make money through any market cycle.
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For more income, now and in the future,
Kelly Green
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