I hope you are safe and well.
In times like these, it can be difficult to think straight. The instability of markets – all markets – are as perturbing as they are perplexing. It can be hard to figure out what exactly is going on.
Consequently, investing in these tough times can be a bit like driving down an unlit country road in heavy fog.
We have a couple of choices: We could pull over and wait for the haze to clear. But what if it was imperative that we get to our destination? In that case, we navigate slowly and carefully through the haze.
Something similar is happening when we invest. What if, like me, you need a continual flow of income from your investments. Can we afford to just sit back and do nothing?
Can we afford to wait for a “V”-shaped, “U”-shaped, “W”-shaped, “L”-shaped or even a “Square Root”-shaped recovery before we start putting our money to work?
Before you answer, just look at what central banks and governments around the world are doing….
…. they are dousing the flames of pandemia by opening the taps of monetary and fiscal policy to full. Their response is understandable. They are doing whatever it takes, whatever it costs to get us through this.
But the cost of riding out the coronavirus pandemic could be astronomical. It already is for many of us, as interest rates plunge and dividends are cut.
But we need to remain calm. That doesn’t mean sitting on our hands and do nothing. There is a lot that we can do, especially if we are income investors. We need to think rationally.
I have done some quick back-of-envelope calculation that suggests the changes in dividend payments for each individual stock in my two model portfolios, namely KIP and MMM, could be somewhere between a drop of 100% to a rise of 20%.
It is hard to be precise about how much the payouts could change. But it is better to be roughly right than totally wrong.
What it does show, however, is that it is not a complete disaster.
Based on the allocations for my two portfolios, the cumulative drop in expected income could be around 30%. But despite the drop, the aggregate dividend yield could still work out at around 3%, which would be better than leaving money sitting idly in the bank.
And as rational investors, especially rational income investors, that is how we should be thinking.
Doing nothing is not really an option. But working the problem is.
We should be looking through our portfolios – no matter how painful that could be – and identify the shares that could help soften the impact of any dividend cuts. Think in terms of portfolios rather than individual stocks.
We don’t need every stock to be going at full pelt for a portfolio to move forward. Just enough of them doing well should be good enough.
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Disclosure: David Kuo does not own shares in any of the companies mentioned.