By: Chase Clemens
The skinny: According to a recent Bloomberg Business article, stocks are at record highs while interest rates are at record lows. This makes it more difficult to find an investment income that’s “safe.”
So, how do we find new, innovative ways to invest?
A traditional investment strategy since the end of the ’90s has been to buy dividend-paying stocks, while hoping to benefit from the stock market’s upside. A dividend is a cash payment from a company’s earnings that is allocated to its shareholders. Dividends are one of the few ways for investors to profit from ownership of stock without eliminating their stake in the company.
However, with the price of entering the game at an all-time high with low return interest rates, this is no longer as viable. Investors’ portfolios are too narrow for this to be a worthwhile payout. Investment firm SigFig analyzed 300,000 investors’ portfolios and found that people receive income from only a few different stocks. Of investors over the age of 40, 52% are getting their income entirely from three or fewer dividend-paying stocks. Another 31% of 40+ age investors are relying on only one dividend-paying stock.
This is risky because you are hedging your financial future on a short list of companies. According to Jason Hsu, co-founder and vice chairman of Research Affiliates, these US dividend-paying stocks are as expensive as ever. For example, The Dow Jones U.S. Dividend 100 Index is up 181% over the past six years, reflecting high expectations. This upside driven strategy is unstable because profits will diminish if the economy stumbles.
The solution? Investing internationally. Hsu says, “if people are willing to invest in companies based outside the U.S., they can find companies paying healthy dividends at more reasonable valuations.” Investing solely in the United States amounts to excluding three-fourths of the global economy and over half of the world’s stock market value. Attractive dividend stocks are often high-risk, high-reward assets. But, this is not a recommended strategy. Investing in troubled companies and betting on a stock turning around may look like a good idea, but often companies have not had the ability to pay them.
So, investors should diversify their money by investing less in more diverse stocks to lower the risk of large losses. Investing consultants will typically put client’s funds in hundreds of stocks and bonds to create a diversified income portfolio. Essentially, this means buying stocks and bonds from several different categories including different exchange-traded funds (ETFs), international stocks, U.S. preferred stocks and varying bonds.
In summary, avoid investing in what promises a big payout; it’s often too good to be true. Rather, communicate with an adviser to think outside the box from investing in expensive, “safe” paying dividend stocks. Instead, investing abroad offers opportunities to participate in markets with higher rates of growth. This has the potential to both lower the overall risk of your portfolio, while also diversifying it.
Gibley, Michelle. “Why Invest Internationally?” Charles Schwaub. 24 July 2012. Web. 23 Apr. 2015., Staff, Investopedia. “How Dividends Work For Investors.” Investopedia. 6 Jan. 2004. Web. 23 Apr. 2015., Steverman, Ben. “How ‘Safe’ Investments Could Destroy Your Portfolio.” Bloomberg.com. Bloomberg, 22 Apr. 2015. Web. 23 Apr. 2015.