Get Paid to Wait
Stock market decline, and how much lower for how much longer remain among the top questions we are getting from clients lately. All you have to do is look at our recent blog posts to see that! This is despite an S&P 500 return of +6.6% for the last week of May. Granted, we are still sitting at -13.5% year-to-date for the S&P 500, so the concerns are certainly understandable. Side note: I still get very frustrated when news outlets quote the Dow Jones Industrial Average. The S&P 500 is a far better indicator of the broad US markets, but I digress!
Often, fear-based investment decisions lead investors to seek out CDs or other “non-money-losing” solutions. Sarah Irving wrote about some more thoughtful ideas regarding what to do in the face of market declines (beyond “getting out”) in her most recent post.
Despite the recent rate increases from the Fed, savings and CD rates at banks remain low, especially when compared to inflation. So, even though you may not see your principal value going down on paper (and that feels good), you are most certainly losing purchasing power over time. A quick search of CD rates on Bankrate.com shows the highest 5-year rate at around 2.6%. Compare this to the current headline inflation rate of 8.3%, and you get a real return of -5.7% (your rate of return minus inflation).
Believe it or not, inflation ticked down in the most recent monthly reading. The hope (and expectation among most) is that this trend will continue.
One option to consider as an alternative to the headline-grabbing and more volatile tech stock sector is dividend paying stocks. These types of companies are sometimes considered boring in times of overall market growth, but dividends usually pay consistently even when stock prices fall. And, while they may not perform as well as their tech/growth counterparts during bull markets, their prices aren’t normally as sensitive.
While we do not write these posts to push any particular solution, it is worth noting that one dividend ETF that we use is down only about 4.5% this year, but it is paying over a 7% annual dividend yield (note: this holding does not represent anywhere near 100% of any client’s portfolio). While it still hurts to see the price decline, this type of investment has a far better chance of outpacing inflation over time. And, with respect to timing the market and whether to invest now or not, would you take 7% a year in annual dividends to wait for stock prices to recover?
Even with the S&P 500, which is not built specifically for dividend income, it has yielded far better than the US Aggregate Bond Index since 1976 (not including the huge outperformance in price growth of the S&P). While the below chart is a little more than a year old, it does prove the overall point that dividends will yield better than most other options over time.
Speaking of better growth over time, my son is officially taller than my mom as of this past Mother’s Day. This did take just over 12 years to occur, and I do expect dividends to outpace inflation in a much shorter timeframe!