We are often under the impression that when we invest in the stock market, we are taking risks. The media doesn’t miss an occasion to remind us how the stock market crashed in 2008 and makes also sure to “advertise” on their premium spots every time investments drop by 10%. Considering it happens all the time, we are fooled into perceiving that the stock market is a risky place to invest our money. It gets even worse when we are about to retire since we count on our nest egg live the life of our dreams.
But what if I tell you that a 100% dividend stock portfolio is a safe portfolio? Even for retirees?
Let’s Start With What We Call “Safe”
I’ve met many investors during my career and the perception of a safe investment can be summarized in 2 types:
- Bonds & Certificate of Deposits (CD’s)
- Real Estate
When you look at individual bonds or even at a bond ladder you can expect to barely beat inflation. A good bond ladder should help you beat inflation by 1% (averaging a 3-4% yield). However, the problem is that if you go with bonds, you will see your capital fluctuates over time (due to interest rate movements) and if you go with CDs, your money is frozen according to the maturity dates. Low yield, no flexibility and still a risk of losing money (if you want to withdraw your money before term). There is nothing here that convinces me that it’s “that safe”.
When you look at Real Estate, it’s even worse. Investors think it’s a safe place to put your money while you can definitely lose money. Further to this logic, most Real Estate investors tend to remember the price paid and the sale price and forget about everything in between (taxes, maintenance, mortgage interest, empty apartments, etc). When you factor everything in your yield calculation, you will notice that, once again, Real Estate beats inflation by 1 or 2 %. However the risk and the liquidity of your investment should be a concern.
As you can see, even the notion of “safe”, once analyzed, is not so safe when it comes down to investments. I guess each asset class has their pros and cons.
Now Let’s Look at Dividend Stocks
Now, when you look at the historical yield from stocks (regardless if they pay dividends or not), we find an investment return of 8-9%. While dividend stocks may have less growth during economic booms, they also go through smoother drops during a recession. One way or the other, they have a huge advantage; they distribute a part of their profits.
The dividend payout is what makes dividend stocks so “safe”. But it’s not only the fact that you receive a quarterly payout that makes them interesting. It’s the fact that these companies are so well established and are so strong that they are able to share their profits. If you build your portfolio with Dividend Aristocrats, Achievers or Champions, you will likely have a positive yield after 10 years. The best part is that you will also earn dividends in the meantime ;-).
What does “Safe” Mean?
If you are considering a safe investment, one that never show a negative yield, I have a little surprise for you. Some of these “safe” investments are pretty risky as they will offer an investment yield under the rate of inflation. Therefore, you are 100% certain to lose money while investing. How safe is that?
In order to consider if an investment is safe or not; I would consider the possibility of losing money over more than 10 years. If you don’t invest over a long period of time, then, just get a high interest savings account and forget about the rest. But if you are investing for your retirement, you should define the word “safe” with a larger spectrum. In fact, even if you are retired, you should have the same definition of “safe”. Why is that? Because you will most likely be retired for a good 25 years! So unless you have tons of money and just don’t care about how much you are making with it, I think that dividend stocks would be a great place to invest your money.
In my opinion, a “safe” investment is one that will not only protect your capital but will also protect your money against inflation over a 10, 15, 25 year period. And this is what dividend stocks do. You get paid to wait and can still expect good growth from the stock.
I think it’s silly to check your portfolio statement on a quarterly basis (let’s be honest, you check it at least once a week) and reshuffle the stocks in your head before your pull the trigger and decide to sell some stocks to buy more “interesting” ones. I think this is why most people lose money: because they can’t endure the pressure of losing money on paper. I think it’s important to have fundamental reasons to sell a stock, not just doing it due to a “technical” situation.
What’s your take? Do you think that a 100% dividend portfolio is a safe investment?Google+