Dividend Review and Thoughts on Market Sentiment

It’s funny how quickly stock market sentiment changes. There’s that saying sell in May, go away. Well, lately it’s more like sell as soon as you can and just never buy stocks again cause the entire system is about to collapse.

Except then there’s a few positive days and everything is great but also it’s just a dead cat bounce but also maybe it’s not. Who’s to say?

It’s the same story every time there’s a market correction and the paper losses and uncertainty certainly suck in the moment but a few years from now, it’ll likely be OK and things will be more normal again. After all, we’re just a year or two away from the pandemic panic which was quickly forgotten and replaced by a ridiculous bull market.

And now we’re back in a bear market that’s basically correcting the ridiculousness away.

Yea, sure, maybe the whole system is built on a house of cards that’s always one pull away from a collapse but how is that different than a year ago or a decade ago?

The main difference from recent years is now the easy money ride is starting to come to an end. That’s causing a variety of things to happen including a stock market correction. All in all, it isn’t necessarily a bad thing as we do have some issues to fix and a correction, for those who can take advantage of it, can be a long term return generator. I’d certainly rather buy stocks with a 5%+ free cash flow yield than a 1% free cash flow yield.

The recent change in policy is finally seeing interest rates climb out of the basement and to me that’s a good thing, at least in the long term. In the short term, it’ll cause pain in stocks and longer term bonds as it already has but the federal banks have to regain control of monetary policy because right now they don’t really have it.

In the long term, these changes might lead to a more normalized financial system where both stocks and bonds are in some sort of equilibrium.

Inflation is out of control and rates need to come up to combat it and that means the ridiculous valuations of the free money era are coming to an end.

The nice thing about this correction is that it’s more driven by changes in policy and how they impact other investments, not necessarily a massive underlying change in risk(which may still come later). Companies are still doing well for now, it’s just that their valuations were stretched and market sentiment shifted away from those sub 3%  free cash flow yields now that bonds started to yield 4%+.

After all, a risk free treasury that yields 4% must cause a repricing in riskier assets that were based on a risk free treasury rate near 0%. That will also impact bond funds and longer term bonds that were yielding 1-2% and can now be bought on the open market for double that. That’s why longer term funds like TLT are down 30%+ in the span of a few months.

So what’s an investor to do? I’ve mentioned this in these posts before and will mention it again, not much. If you have a long term horizon then this won’t really matter. People will say that stocks are on sale now but that’s not really true either, they’re just getting back to an equilibrium with other assets since the value of those has changed so the value of stocks must follow.

Stocks will eventually return to their historical returns but that may come after a prolonged correction and potentially permanent losses in some names.

If you’re invested in index funds, those purchases made when valuations were at 35x+ might take a while to recover and will require some earnings growth. However, that will eventually happen even if it takes a bit of time. Purchases made today will likely do relatively well in the long run but may still suffer in the short term if interest rates rise and we have a recession that cause earnings to drop. Something dropping 30% doesn’t preclude it from dropping another 30%. P/E ratios are back to sub 20s now but if earnings suddenly drop 20% then those P/E ratios will drop some more as will the E in that calculation causing another drop.

On the opposite side, speculative investors may find themselves with permanent losses especially for growth names that don’t perform as expected. That’s just the risk investors in those names take. When the going is good, it’s real good but when it’s bad, it’s REAL BAD.

When the risk free rate is near 0, people are willing to take on a lot more risk. Now that risk free rates are 4%+ and rising, people need a lot more reward for said risk because the risk free rate is starting to get appealing. That changes the dynamic of the game.

For me, not much has changed. I have a 10% cash max in my investment plan and a small allocation to short term bonds and both have been helpful in this situation. As stocks fell, I’ve been deploying more cash and getting back in at more reasonable values. My bond funds fell a bit but not a lot and are now generating much better income. In fact, bonds are starting to get a lot more attractive at these yields than they have been in years which is a good thing.

Is this the bottom? No one can tell but I don’t think so and that’s simply because I think the risk free rate still has upward moment. But, whether it is or not, I’ll keep buying. My investment plan makes it so that I’m invested almost all of the time because in the long term, staying the market is a winning game. Sure, I’ll likely lose money in the short term but these are all paper losses and not a huge bother.

I’ve actually been surprised by how little I’ve been mentally impacted by this downturn. That’s been a positive for me and in some ways driven by other things happening in my life that made me realize that life is short and paper money or money in general doesn’t matter much.

I don’t need this money for years, have an emergency fund and a pretty safe job. On top of that I’m mostly invested in index funds that will eventually recover. That’s also the beauty of my investment plan. If I was invested in some small cap tech stock that was down 80%, I’d certainly be more worried, but since I’m mostly in index funds, it’s a lot less big a deal.

Sure, I’ve lost like 5x my starting salary when I was 23 in paper losses but who cares. That would sound crazy to 23 year old me but my perspective has changed. On top of that, this also comes after a time where I gained 5x in starting salary in barely a year or two after a pandemic that impacted so many negatively. It’s been a crazy market and this is just a continuation of that. It’s just that many don’t feel it as deeply when things are going up than when things are going down but to me the rocket ship after the pandemic was more ridiculous than what we’ve seen recently. At least this correction makes sense.

So yes, I have some paper losses but it’ll probably recover by the time I need and if it doesn’t then we’re all pretty screwed in other ways; just got to enjoy life right now and not worry about money. Hell, just being able to lose money on paper is such a privilege that many don’t have and I know that. I hope you do too if you’re staring at bit losses in your accounts.

Plus since this is a dividend post, it’s also nice to see those dividends grow and flow in at these lower prices. In the end, do prices really matter in the short run? It’s X one day, Y another but as long as my number of shares keeps growing and prices eventually go up, I’ll be ok and that’s a key part of investing to remember. It’s important to put that into the perspective of a well diversified index fund and not some individual stock. If it’s an individual stock then prices can certainly go to 0. If an index fund goes to 0 then aliens have come, bombs have exploded, zombies have risen and you should kiss your loved ones because life is about to be a real disaster.

That’s the nice thing about dividends, market sentiment or not, you get them. I understand why dividend investors do what they do, because it’s simple and easy to understand. Sure dividends can get cut as we saw during the 2008 recession but they’ll eventually recover as we saw after said recession and getting that income stream feels pretty nice especially as it grows because right now even if prices are down a lot, dividends are still growing and I’m getting more and more shares each month.

And, to keep it even more positive, this is September, one of my bigger months since I’m mostly an ETF and index fund investor!

Last September came in at $2,536.63 so let’s see where I am this month.

September Dividends

September’s dividends came in at $3,336.88 or a 31.5% bump over last year.

That’s a pretty huge bump especially for such a big month. I think part of this is due to timing since some of my ETFs saw big growth in this month after low growth(or negative growth) in March and June so the payout here is higher. Another part is just simply good growth across all income fronts. Bonds actually pay something now and even those who hold cash in a money market account can get nearly 3% today.

That’s a big shift in income for those who depend on it and might be a good thing for certain people despite the large drop in prices that change drove. If you’re not selling right now then are those low prices that big a deal? I don’t think so.

Bigger months mean more money is re-invested and helps the compounding on both my holdings and future income. This month’s income re-invested will boost my forward annual income by $110.12. It’s not huge but re-investing at lower prices means more shares which means better income and when prices begin to recover, better portfolio totals.

It may not be a great time for your portfolio totals but one has to look at the positive side of things!

Steve, my dividend employee certainly enjoys months like this one and he’s not perturbed by lower prices. His hourly wage was a solid $20.02/hr. this month and while his annual wage of $8.51/hr. is still far from a livable wage especially in this inflationary environment, he’ll take it.

For the year, the dividend total sits at $11,351.71 or a 16.5% bump over this time last year. It’s nice to see these dividends start to tick up in recent months and start to eclipse the inflationary pressures on my expenses.

I don’t depend on this income right now and re-invest it all but I’ll certainly want my income to keep up with inflation when I do.

The nice thing about all this is that my biggest month, December, is still ahead. You can see that in the graph below.

The good thing about this year is that due to rising rates and the impact that has on my fixed income payments, even the smaller months are starting to rise so I’m looking forward to October and November as well but December is the month to beat all months.

However, it’s never a guarantee that we’ll see huge growth in these quarter ending months. After all, while the annual payments may grow, certain ETFs may see big growth in some months and slower growth in others just like how September saw big growth in certain ETFs. That may lead to lower growth in December. It all depends on the underlying holdings and timing of their payments versus the payments of the ETFs and index funds.

Overall, as long as the overall year is positive then things are looking good. I haven’t seen many dividend cuts happening out there so we’re still not in a spot where companies are struggling but I could see that happen in the near term if the economy heads a bit south.

It’s difficult to call this a recession since jobs are still available and incomes are rising but there’s certainly potential we head that way as rates rise and things become more expensive. Main street definitely has its struggles and that will float down to certain industries as discretionary spending is squeezed.

Speaking of main street struggles, one of the main risks to long term investing is job loss and that’s certainly not something one would wish on anyone but in times like these, its important to try to prepare for something like that. After all, it’s easy to say you’ll just keep buying through a downturn but that only works when you have the income to do that. If you lose that and finding a job becomes more difficult, long term returns wont matter if you have to sell at the worst time.

One day I’ll be in a spot with my portfolio and dividends where that doesn’t matter but I’m not quite there yet. For me, I’m not super worried about my job prospects nor my wife’s but you never know. Hopefully it’s not something we’ll have to worry about but its certainly something one thinks of more in a time like this. I guess that’s part of what makes a market downturn so hard to stomach, may just aren’t prepared for it and don’t have the cash to ride it out or take advantage when it happens. I guess I’m in a good spot on that front.

That’s still one reason why I keep investing so that it’s easier to not care as much as these income reports become bigger and bigger. We’ll get there one day but I’m still probably many years away from that. Until then I’ll keep saving through highs and lows and see what happens.

Thanks for reading and hope you’re doing well through this downturn and keeping positive even if market sentiment sucks!