The U.S. stock market is experiencing its worst start in history. At more than 5% down year-to-date, that puts the market heading into to correction territory, which is a drop of 10%. While what the market is doing matters, it doesn’t matter today. Before you panic and sell your investments, consider what is driving the selloff. Currently, there is a global fear coming from overseas, specifically the slowdown in China’s economy.
Of course, our markets will see the effects of China’s slowdown. The S&P 500 Index’s Basic Materials sector is down nearly 10% this year, which is directly related, as China and emerging markets are the main users of commodities. Additionally, we are seeing Saudi Arabia flooding the market with its oil supply, which is keeping prices low. While this puts more pressure on domestic energy companies, low oil prices are not bad for the consumer. My guess is that you enjoy going to the pump and seeing low gas prices. Furthermore, we are seeing the consumer keep their savings rather than spend it. This also adds to our current slowdown.
So overall, while it matters that the markets are down, we believe it is far more important to look long-term. If you are following the Ten Year Rule investment philosophy, the money you have invested in the stock market is money you will not need for the next 10 years. Therefore, the day to day movements in the market should not be of significant concern to you. As an active investor, now is often the time to buy because you may be able to pick up good companies at bargain prices.
With that said, what should you be doing with your portfolio? Let’s say you are following the Ten Year Rule, and money you need within the next 10 years should be invested in fixed-income investments to protect the principal. It’s no secret that fixed-income investments are paying very little, as we’ve just seen the first interest rate hike in nearly 10 years. To boost income and add some protection to your portfolio, you may consider adding dividend-paying stocks to your portfolio.
When evaluating dividend-paying stocks, you should look at the company’s dividend coverage and whether the company is earning enough to pay the dividend. We take a two-pronged approach to dividend investing, focusing on dividend growth stocks as well as those considered to be high-yield. When looking for dividend growth companies, we target those that pay out less than 65% of what they earn. While the current dividend may be low in comparison to high-yield stocks, you’re looking for companies that are on a trajectory to grow their dividend in five to 10 years and provide you with a greater cash flow over time. When considering high-yield dividend companies, we look for a payout ratio less than 100% of their earnings. In either case, the important key is to look at the company’s dividend coverage and ensure that it is greater than 1. This indicates that the company earns enough money to at least cover the dividend without having to borrow or reach into company coffers in order to make the payment. There are opportunities to find companies paying above-average dividends that are covered more than 2½ times with the cash the company holds. When there are downturns, you can look toward a company’s balance sheet and the outlook for the industry. If a company has the cash reserve to cover their dividend payments for eight to 12 months, the stock can likely weather the downturn. However, if the outlook for the industry is more uncertain, you may consider replacing it.
Creating an active portfolio is a complicated task. If you have questions regarding your investments, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
