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Smart Thought Of The Week: Battle Royale

I am thoroughly enjoying the toe-to-toe Battle Royale that is going on in the markets at the moment. In fact, there are two very heated battles going on simultaneously.

The first is the tussle between bond investors and stock market investors. The other is between the Dow Jones Industrial stocks and those companies that find themselves perched on lofty valuations on the tech-heavy NASDAQ.

As to who will win the first battle will depend on how much money the US Federal Reserve is prepared to spend on buying Treasuries to keep those closely-watched bond yields down. It would take a brave person to bet against the Fed winning that one.

The other battle should interest stock market investors….

…. High interest rates, it can be argued, could be good for the so-called old economy shares. These are the boring companies that tend to do well in an economy that is either recovering or purring along. They have been gathering dust for years because the market just hasn’t been that interested in them.

But high interest rates are supposed to be bad for heavily-indebted companies that tend to do well when they can borrow money cheaply. That has been the case for a number of years. So, the threat of higher interest rates around he corner has resulted in a sharp change of sentiment.

However, using a broad-brush approach to segregate shares is about as inappropriate as the Orwellian classification that four legs are good and two legs are bad. Remember that sentiment can change quickly.

If we are long-term investors, then we should focus on the long term. If we are long-term income investors, then focus on the dividends that your company can pay over the long term….

It is irrelevant whether the company is high-tech, low-tech, or even no-tech at all. All that should concern us dividend-seekers is whether the company can generate adequate cash flow to pay dividends, whether the dividends can grow over time, and how much we will pay for those dividends.

Some could be technology shares, some could come from consumer staples, and some could be financial counters. Put another way, there are only good income stocks and bad income stocks.

So, put together a portfolio of good income payers, and you could be skipping all the way to your retirement and beyond. Don’t be distracted. The market can be very good at distracting you from your objective, which is simply to invest and stay invested in good companies.

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David owns shares in none of the companies mentioned.