My friend Simon Erickson is perky. There’s probably a better way to describe him, but “perky” is how I like to think of him.
I have never told Simon this.
I sat down across the “Zoom” screen (technically, we used Riverside.fm, which is like Zoom’s better-dressed uncle) with Simon – a native Texan who represents the state well – to chat about something I advised investors on for 10 years: dividend stocks.
Why dividend stocks may take off
The case is simple: With the 13-year bull run in the rearview mirror, investors are tired of the overhyped growth (and often garbage-y) stuff. They want substance again. And a lot of those unprofitable companies were only mathematically attractive thanks to an aberration – historically speaking – in interest rates.
Their superpower wasn’t a superpower: It was just low interest rates.
Now, to paraphrase Warren Buffett, with higher interest rates here, their nakedness has been exposed.
But high interest rates mean bonds pay more, and higher-paying bonds compete with dividend stocks.
So if we’re keeping score for dividend stocks, good for the market’s newfound (re)focus on proven business models, real cash flows, and tangible value in general, and bad because bonds now pay more.
The tiebreaker could be falling interest rates, which the Fed expects to become a reality within a year or so.
Now, the Fed may be wrong. The Fed may be trying to talk rates down – bluffing with the hope of creating emotion that leads to economic reality. Many analysts see some of this happening.
Will we have inflation – or deflation – or neither?
And some (often anti-government, anti-central bank types) believe that the Fed (along with the Bank of England and the European Central Bank) not only colossally missed inflation, but are still underestimating it – i.e., the Fed’s posturing, and rates will need to go higher still to extinguish the fiery mess the Fed made by opening inflation’s Pandora’s Box. Still others see deflation happening, believing the Fed overcompensated to create inflation, and is now overcompensating in trying to bring it down.
I’m getting sidetracked. If rates go down, which is kinda-sorta the majority view, that’s in principle good for dividend stocks.
Although I mentioned two stock names in my chat with Simon, I’m not per se telling you to go buy dividend stocks. There’s also an argument that dividends may see less use one day if buybacks keep gaining in popularity (buybacks are a capital budgeting alternative to dividends from a company’s perspective). But, to be circumspect, I’m also not telling you not to, either: As with anything in your portfolio, it’s up to you at the end of the day.
James
p.s. If you DO decide to buy dividend stocks, know that my very favorite place to buy them (obviously…) is BBAE! Check out just how great BBAE’s stock-buying experience is (and get a super-cool big-bucks account opening bonus) by clicking right here. Miss that link? Here it is again.
