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Home Kuo’s Smart Take Smart Thought Of The Week: Souffle

Smart Thought Of The Week: Souffle

Welcome to dress-down Friday. Come to think of it, it has been dress-down workday, every day, for longer than I care to remember….

…. In fact, it has been so long time since I had to wear a shirt and tie that I wonder if I will be able to remember how to tie a Windsor knot anymore.

Of course, I will. There are some things that we never forget. And lest we do forget, we can always prepare ahead of time.

Being prepared is key. It is not only important sartorially, but financially, too. But I wonder how many of us have cast aside the need to prepare for our retirements because of the confusion in the markets created by COVID-19.

It is especially difficult when stock markets around the world rise and fall faster than my home-cooked souffles. One minute the market is up several hundred points and then it is down several hundred points by the close. It is enough to give anyone the screaming abdabs.

The gyrations suggest that stock-market punters don’t know what they are doing. I suspect many of those who are punting on shares really don’t have a clue.

In fairness, it is hard to pick shares, when valuing them based on the tried-and-tested price-to-earnings ratios are almost meaningless. After all, when there is no “e” or earnings to speak of, the PE ratio can be anything that we want it to be….

But there could be a better way to value shares, especially if we are dividend investors. That’s because dividend yields can be a more reliable gauge of value.

Currently, most of the major markets sport a dividend yield of about 3%, which is better than US Treasury yields of around 0.7%. And even if we assume that dividends could be cut in half, they still look more attractive than a risk-free investment.

And only when bond yield are significantly higher than dividend yields, then bonds could start to look interesting. A 3% differential would be significant. But that doesn’t seem likely for some time. So, until then, ignore the market spasms, and keep adding money to your favourite dividend-paying shares.

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Disclosure: David Kuo does not own any of the shares mentioned.

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