It’s hard to remember a new year that began with so much exuberance. It’s almost as if investors couldn’t scoff their turkey down quick enough. They we’re just itching to get back into the markets.
The world’s biggest economy, the US, continues to surge ahead. Japan, the rest of Asia and Europe are also chugging along nicely. Analysts everywhere have been rushing to upgrade their forecasts.
Even the overly sensible folk at the World Bank have put down their biros and donned their party hats. This week the bank raised its growth forecast for the world economy to 3.1% for the year. It also expects a similar level of growth for 2019.
And the markets have been rampaging higher as well.
Just last week, the Dow surged through the 25,000 barrier for the first time. Euphoria abounds as Trump’s tax cuts work their way into the US economy.
And after having a headache for most of last year, our own Aussie market finally decided to jump aboard the latest move higher.
It’s all a far cry from where we were only two years ago. Back then, the Aussie market was heading for the floor. And the US market looked like its bull run had come to an end.
At the start of 2016, the Dow had fallen back through 16,000. However, in only two years, the Dow has rallied over 50%. That’s a massive move for such a large market.
The move higher has buried a swag of hedge funds. Having torn up their investors cash by shorting the market, the former ‘Masters of the Universe’ have been scrambling to get back on the right side of the trade.
Of course, such a big run makes investors nervous. Come March, the Dow will be celebrating its ninth anniversary of this tear away rally.
When the market is running away to such massive gains, it’s tempting for income investors to think they have missed out on the action.
They look at growth stocks that have increased massively in value. Stocks that are trading on multiples like 50 times their current earnings.
All the while their income stocks, while paying out a steady stream of income, have not gone up as much.
But markets always look to the future. Share prices already encompass any historical news and data. The market bids up (or sells) a stock based on what it thinks it will do in the future.
The stocks that the market bids up excessively will be the first to struggle, should market sentiment change. The market will quickly jettison their growth stories should the market take a turn.
Diversify your portfolio with income stocks
Increasingly fund managers are looking for a trigger that could bring this bull run to an end. And it’s this that we need to keep an eye on in 2018.
As investors, we want to make sure that we don’t have too much of our holdings tied up in growth only stocks. And this is where income stocks fit into the picture.
Of the 2000 or so stocks listed on the ASX, only around a quarter of them pay any dividend. And of that 500-odd who do, only around 350 pay a dividend higher than what you could get on a term deposit.
In purely number terms, nice steady dividend payers are actually a minority in the market. However, as a group, they make up the largest weighting of the market.
Why? Because it’s the cash a company generates that ultimately determines its value. It’s something the professional money managers and savvy investors already know. And it’s where they invest their money.
The professionals understand that it’s the companies that have real businesses, that generate real cash, that stand up best if the party comes to an end.
Most investors are very familiar with the big dividend payers. You know the ones I mean. The banks, supermarkets, telcos and real estate investment trusts (REITs). You might even own a swag of them yourself.
But perhaps the most interesting thing about income investing is that many investors just don’t know about all the other dividend payers.
Go on, test yourself. Outside the top 20–30 dividend payers, how many of these other 500 stocks could you name?
It’s these other income stocks that we specialise in at Total Income. Stocks that are growing, generating surplus cash, and sharing that with their investors. If you’d like to know more about them, why don’t you click here to get started.
All the best,
For Markets & Money