This 'Forgotten' Moneymaking Strategy Can Keep Your Portfolio Afloat
Editor's note: The conventional market wisdom no longer applies...
Traditionally, previous generations have relied on fixed-income opportunities to build their nest eggs. But Retirement Trader editor Dr. David "Doc" Eifrig says that in today's low-yield environment, investors can no longer rely on the usual methods to earn a steady cash flow. Instead, today's retirees must turn to stocks – and accept the risk that comes with them.
But there's another piece of the puzzle that today's investors are missing. According to Doc, a specific type of stock can protect your portfolio, even when the market tanks...
In today's Masters Series – adapted from the July 2021 and January 2022 issues of Retirement Trader – Doc discusses the unique investing problems facing today's retirees... shares the "best game in town" to beat inflation... and explains why this overlooked investment vehicle is gaining favor amid market uncertainty...
This 'Forgotten' Moneymaking Strategy Can Keep Your Portfolio Afloat
If you plan to retire in the next few years, the deck is stacked against you...
I hate taking such a pessimistic tone. But I'm not going to sugarcoat things.
The truth is, if you're looking for a decent return on your nest egg, there aren't many ways to do it... at least, not without loading up on risk.
Given how expensive retirement can be – and how much those costs will likely grow in the near future – few folks can afford to have their hard-earned cash lying around, earning close to nothing.
Unfortunately, close-to-nothing returns are what you should expect out of most fixed-income investments today... And the closer you get to retirement, the more importance you place on preserving your capital.
Solving this conundrum isn't easy. That's because the world has changed...
Conventional wisdom says to own stocks when you're young and bonds as you get older. Over time, stocks will earn you about 7% or so per year. But in any given year, the market might crash.
Stocks are risky. And you accept that risk when you're young because your holding period can run for decades – giving you enough time to make back what you lose and then some.
But when you're about to retire, you can't afford even a single bad year in the market. You'll have bills to pay with no paychecks coming in. The "professionals" tell you to exchange potential gains in the stock market for more safety.
That's where fixed-income investments come in... or at least, it used to be.
For the most part, you'll know what returns to expect: about 4% to 5% in bonds. They're far less volatile than stocks. And for a long time, investing in fixed income was more than enough to safely grow your nest egg in retirement.
Previous generations had it much easier... All they had to do was lend their money to the government or to a bank, and they would regularly earn a return that beat inflation. Before 2000, the yield on the 10-year Treasury note was routinely above 6%.
But like I said, things have changed. Fixed-income investments won't keep you afloat like they used to.
Consider that 10-year Treasury yield, for example. Rather than 6%-plus, it's a measly 2.7% today...
With inflation running rampant and more interest-rate hikes on the way, the bond market has a rough road ahead. Plus, bond yields don't look as attractive compared to the yield you can get from stocks.
So if you're getting ready to retire, what are you supposed to do? Simply settle for the little-to-nothing yield you can find in bonds?
If you do that, your purchasing power will decline over time. Earning 2.7% in 10-year bonds won't cut it when inflation is roughly 8% per year. That trade would lock in a loss of 5.3% per year.
That's why you need to find a return that will be greater than inflation.
And to do that, the best game in town... is stocks.
Of course, stocks are risky right now. Investor fear is causing big swings in the market. Plus, many corporations have loaded up on debt, and some folks are saying we're in a debt bubble.
But since the outlook for bonds is bleak, you need to own some stocks. There aren't many other choices.
The hard part is deciding how much of your nest egg you want invested in stocks. A lot of that will depend on your age and what stage of life you're in.
But you must start by understanding one thing today: The conventional wisdom is out of date. Everyone should have some money in stocks... And that includes retirees.
The problem is, today's investor has forgotten how to make money...
I'm not calling anyone dumb – but too many people are shortsighted. Lots of folks in the market are too focused on making giant overnight gains on companies with no profits... or even sales.
Picture somebody sitting on the couch in his pajamas, scrolling through Twitter or Reddit for the latest hot speculation. He's hanging on to every word from Elon Musk. And then, he opens up Robinhood on his phone to place moonshot bets.
If you only invest in growth stocks, you're missing a huge opportunity to make money...
It may not be a sexy idea. But it's how the vast majority of past investors have become wealthy in the stock market.
Dividends have played a crucial role in generating positive returns...
For example, since 1926, dividends have represented roughly one-third of the total return for the S&P 500 Index. Capital appreciation has made up the remaining two-thirds.
Imagine the boneheaded investor who bases his entire portfolio on stocks that don't pay dividends. They can only generate a return if their prices go up. Over time, he's leaving a lot of money on the table.
Owning dividend stocks is also a defensive tool. In decades where major financial crises strike – like we saw in the 1930s and 2000s – dividends can keep a portfolio afloat. Take a look...
Dividends aren't just cash in your pocket. They're also a sign of strength. Companies that increase their dividends year after year often have strong businesses with wide moats. They can hold up well during times of economic stress.
Now is the right time to put money into dividend-paying stocks...
Interest rates have been on the rise recently. The yield on the 10-year Treasury has moved from about 1.35% in early December to 2.7% today.
Even though rates doubled within a few months, they're still ultra-low, as I explained earlier. But the shift has been weighing on growth stocks. That's because rising interest rates make future profits worth less versus money you can collect right now.
Growth stocks aren't the only investment that's likely to be weighed down by rising rates. You typically see some folks rotate out of precious metals like gold as well...
Gold doesn't pay any yield. When rates are low, gold looks more attractive as an investment. But as rates rise, folks are drawn out of gold and into safe bonds that can pay them cash.
With similar logic, you should expect to see dividend-paying stocks take a hit when rates rise.
Government bonds are risk-free. While dividend-paying stocks are safer than other stocks, they still come with risk. So as yields rise on safe bonds, we often see folks shift their money away from dividend-payers and into bonds. After all, it's hard to beat risk-free.
But here's the strange thing... Recently, we saw the opposite occur.
Rates went up... and dividend-paying stocks went up as well. And the S&P 500 High Dividend Index has outperformed the S&P 500 even as rates crept higher...
This tells us that folks are finally coming to their senses. They have recently been burned by growth stocks and are now putting their money to work with dividend-payers.
I think this trend will continue – even if rates continue to move higher. Dividend stocks have been out of favor for much of the past couple years... and they have to catch up.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: Dividend-paying stocks are a critical way to generate wealth in your portfolio. But an entirely different type of investment has already delivered 116 straight winners for Doc's subscribers. And it's not too late to jump in...
Doc calls it his "instant cash secret" – a crisis-proof strategy that has handed some Americans as much as $4,000 per month in cash... with 93% accuracy... for the past 12 years. Even better, he says this could be the best moment ever to start using it in your portfolio. Doc explains it all in a free presentation right here.