Wednesday, July 13, 2016

Dividend Investment Panic – Are We Losing Our Minds?



This is a guest post by Passive Income Dude at www.passiveincomedude.blogspot.com
 
Recently I’ve talked a lot on my site about yields (here), but today I want to get even more to the point about the crazy negative-yield environment we find ourselves in, and more importantly, what that means for us as dividend investors.

Consider this fact:
 
There is now $13 trillion of global negative-yielding debt. There was almost NONE in mid-2014. Now, close to 10% of all debt is negative!


 
The chase for yield, and POSITIVE yield, is real. Consider the following quote from Morningstar’s DividendInvestor newsletter this month, where he talks about an idea called “There is No Alternative:”
 
“It’s TINA’s market now: There Is No Alternative. This has to be the least inspiring rationale for a bull market ever. No matter how far they’ve already run, how high valuations have become, or how pitiful the under­lying economic and corporate fundamentals may be, we’re told we have no choice but to keep holding stocks.”
 
Does it seem like he believes in the long-term soundness of these increased stock prices? No.
 
So there lies the foundation for my argument. The “There is No Alternative and Negative Yields” argument. The argument that dividend paying stocks are being flocked to like crazy by individuals looking for yield, and individuals who used to look for them in bonds.
 
The problem arises when these individuals think the risk profile of the stock is the same as the bond. Again from the DividendInvestor, “Even when it pays a large, reliable, and growing dividend, a stock is still a stock. Excess popularity usually correlates with high valuations, which can only subtract from future total returns while adding risk.”
 
High valuations and low future returns. Interesting. I recently wrote how Realty Income (O) is overvalued now, in my opinion. Realty Income, to me, could be an example of what is happening and will continue to happen in the near term. Be careful, O’ Dividend Investors, that you are not buying dividend paying stocks at a significant premium!
 
What do you think? I’d love to hear your perspective and comments.
If you would like more investing commentary and insights, please visit Passive Income Dude at www.passiveincomedude.blogspot.com where I share my journey to financial freedom through my own disciplined dividend and real estate investing. Thanks for reading!

11 comments:

  1. Just wanted to give a shout out and thanks to passive income dude for the guest post. Be sure and check out his site as well.

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  2. Thanks Captain Dividend! Great to have fellow investors out there like you to help each other out!

    Passive Income Dude

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  3. Well said. Poor retirees are now chasing yields. They are buying companies that are 15-20% overpriced. They probably don't fully understand the volatility difference between a stock and a bond. Only when this whole thing falls apart will retirees pull out and hold cash...

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    1. Young Dividend,

      Thanks for the Comment. The big challenge is that who knows when it will "fall apart!" :) I just read an article today that Germany just issued a 10yr negative yielding bond. You PAY Germany to give them your money FOR 10 YEARS! Crazy times. :)

      Passive Income Dude

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  4. Don't worry yields will go back to normal. The world is grinding to a halt even after all this printing. I predict one of two things will happen.

    1) The world enters japanese style stagnation. What we've been doing the last 8 years or so. Money will keep printing, markets will edge higher, and in these times investments are static. Growth won't come from businesses but from govt works projects. e.g. abenomics and the "stimulus".

    or

    2) China will enter 1929 style crash. Europe will continue breaking apart. And I predict the world will force the US into a recession even if we don't like it. A consequence of globalization when one of us fall all of us fall.

    either way the market will force yields to go back to normal even if they are dragged kicking and screaming. NIRP is like a game of chicken. the US is like every other country...except we have guns...and a history of using it against govt when we're unsatisfied

    As an aside I expect this entire yield hunt to burst when dividends start getting cut. Oil got annihilated last year and many dividend stalwarts will destroyed. Mining as well. Look at all the earnings on SA. All are beating EPS but losing revenue YoY. Dividends are paid by revenue. A shrinking revenue + demand for higher dividend increases only leads to a bubble.

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    1. Broke Dividend Investor,

      Some very insightful points! I hope you are right that yields return to normal. :) That is good for savers!! But I don't know when that is going to happen, as things look pretty bleak for that being a near term possibility.

      I recently returned from China and think they will be ok. Just a hunch, but I get that feeling for some reason.

      To your point about Japan, can you imagine if we have LITERALLY 15 years of ZERO STOCK RETURNS. 0% for 15 years. What would that do to people's retirement? Pensions? Etc! I plan to write an article on this in the next few days and get it guest published on Passive Income Pursuit's site.

      Keep in touch!

      Passive Income Dude

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  5. Not everyone is pouring into stocks yet. There is still a lot of "dry powder" on the sidelines. The markets are climbing the wall of worry, and I think it has some ways to go yet. We shall see...

    Thanks for an interesting article!

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    1. Ferdi,

      Thanks for the comment! I imagine you are right; but the challenge comes with knowing when all of this uncertainty will shift to actual "fear." And to your point above, I would say people are definitely pouring into specific stocks, and mostly dividend paying stocks, in search for yield, which I was attempting to highlight in my article. :)

      Keep in touch!

      Passive Income Dude

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  6. Yeah there is not much left out there that is a good value for us dividend grown investors. I keep waiting for any dip to get in on some good companies. Brexit was the only good opportunity in a long while.
    Cheers,
    DFG

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  7. Good points! I was drawing a similar conclusion that many retirees and investors were chasing higher yields where you cannot find it in bond markets anymore!

    Can you imagine if and when we do hit negative yield territory, I truly believe new money will flood into dividend paying stocks and it will become very popular. I find it funny because a lot of investors that I talk to in real life always tell me that dividend investing is the "old grandpa" way and boring. But originally dividend paying stocks is the real way of investing before speculation came along. I just think that we and our small community of dividend growth investors got here first before the masses of people will soon realize.

    This is the reason why I think that great dividend paying companies right now could be severely undervalued. Once everyone else jumps ship, it will drive JNJ, T, PG, type stocks up sky high. But I guess we shall see and thanks!

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  8. We are witnessing a very strange market at the moment. I don't think anyone really knows what to make of it. All I know is I plan to hold some cash for the bumpy ride ahead :)

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