March 2nd, 2012
Are you an investor in the ‘New World’ of Low Interest rates?
Comparing Tobacco companies and miners
BAE Systems - results and dividends
Savers, investors and (future) retirees will need to become much more ‘aggressive’ as returns on bank accounts and Government bonds remain historically low and people grow older.
Apparently almost 14 percent of cash ISAs pay the base rate – that is 0.5 percent interest, per year, or even less.
Clearly, with real inflation around 4.5 per cent, if you have a Cash ISA account returning less than 4.5 percent, you only have to blame yourself for being 'robbed'.
And what is worse this so-called negative real interest rate environment looks set to persist for several years. Therefore . . .
Get into higher yielding assets
The traditional mix of putting 60 percent of assets in stocks and shares, and 40 percent in bonds is increasingly inadequate in a “new world” characterised by an aging population, stubborn unemployment, a reduction in borrowing and risk-taking by individuals and governments, and a greater role of emerging economies.
I’ve said many times, both here in Dividend Alerts and elsewhere, that savers, investors and (future) retirees should consider investing in high quality above inflation dividend paying companies when they are historically undervalued and keep them until they become historically overvalued.
A process that often takes years and in the meantime you receive increasing – inflation beating – dividends.
Unfortunately, most investors disregard time altogether with regards to investment returns and, in this period of low interest rates, are in need of a much more diversified portfolio of assets, other than savings.
They have to find ways to achieve a much higher return for much longer periods than they currently get in cash ISAs or government bonds.
What about 'time'?
Dividend Income Investor.com’s perspective of time is very different from many others in the industry.
In comparison to the majority of savers and investors when we talk about 'long-term' we really meany long-term - twenty five, fifty years or even cross generational - as the starting point to create real and enduring wealth.
Unfortunately, many people want instant returns - not understanding how exponentional compounding dividend re-investment works.
In order to do so, you need to be prepared to get your spare cash working for you, long-term.
What is the “new normal”?
It is all around us. . .
Think of slower growth in the developed economies, higher ‘real’ inflation’ (realise that the inflation rate you personally endure is very different from the inflation rate of other people due to different spending patterns), devaluation of the pound, higher unemployment and ongoing (dis)orderly deleveraging in the banking sector and on governmental level for many years to come.
The new normal is morphing into a world of low interest-rates.
Savers and investors nearing or at retirement who have had not sufficient time to build up inflation beating assets will have to continue working.
Make sure you are not one of them!
Instead, embrace a defensive long-term investment strategy that includes emphasising above-inflation tax-free income.
Get paid to invest!
Be aware that not all dividends are created equal.
Sometimes, a company’s earnings alone do not cover dividend payments, with companies paying the remainder of their dividend out of (loan)capital, creating doubt whether dividends, let alone dividend increases, are sustainable in the near future.
Also make sure not to overpay for dividend income.
The time to be in the market is not always now
A share price on its own means nothing. An investor must find some way to determine whether the price of a dividend paying company is high, low or just about what it should be.
When a company ‘offers’ a high dividend yield, many income hungry investors will turn to this company which invariably will push the share price up and gradually erode the dividend yield.
When the dividend yield comes down, increasingly investors will sell such a company, with lower demand leading the share price to fall.
Only once the share price has come down to a price level at which, again, the dividend yield is attractive to dividend income investors demand will pick up and the share price stabilises.
Then the price cycle starts again. Often companies’ share price cycles take a number of years to play out. In the meantime, you are raking in increasing dividends.
Dividend Income Investor.com studies dividend-yield patterns very closely indeed.
Buy dividend paying shares when they are priced correctly
Our investment methodology is based on a value-based approach to long-term investing, one that uses a company’s dividend yield as the primary measure of value and combines it with decennia long share price cycles of dividend yield and share prices in order to ascertain whether a particular dividend paying company’s share price is currently historically undervalued, overvalued or trading somewhere in between.
As a result, our investment methodology leads us not to overpay for a dividend paying company, as well as not to remain invested in the same company once it has become historically overvalued.
You too can have access to this all-important information when dividend paying companies are undervalued or overvalued.
Let me show you which dividend paying companies are historically undervalued and which are not. Use this information to make better informed long term buy and sell decisions.
Join the Dividend Income Investor.com community.
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Till next time
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