Category: Income investing

I turned back to the Ben Stein book that I’ve written about before – “Yes you can Time the Market.” Its pretty much the trends on stock price, P/E ratio, and bond yields. I used it to determine how well I would have done if I followed it since I graduated (Roughly 8% – 11% better than straight dollar cost averaging over last 35 years), at the end of 2019 (where it predicted a drop) and in mid-March 2020 (where it predicted you should jump back in). The overall lesson is that, if you have a long-term outlook, you can do a little better than just following the market.

So how are we looking right now, in terms of the trend lines and ratios spelled out in the book?

Well, the concept is there are four (4) areas where you can follow the trend and determine if you should be purchasing stocks, or purchasing bonds.

1. Price of S&P500 vs. 15-year average: July 14, 2021 = 4,380 vs.15-year average of 2,328. Signal says stocks are overpriced, do not buy more
2. S&P500 P/E ratio vs. 15-year average: July 14, 2021 = 46.55 vs. 15-year average of 26.9. Signal says stocks are overpriced, do not buy more
3. S&P 500 Dividend yield vs. 15-year average: Jul 14, 2021 = 1.32% vs. 15-year average of 2.00%. Signal says stocks are overpriced, do not buy more
4. Earnings vs. AAA corporate Bonds. Jul 12, 2021 = 2.15% (1 / PE ratio of 37.74) vs. AAA bond yield of 2.64% (very low yield). For the first time since Jan 2010 (remember the 2008-2009 explosion), this signal is saying stocks are overpriced.

So all 4 of the 4 signals say stocks are overpriced! Note that the concept does not suggest you should sell all your stocks, or sell all your bonds. What it is saying is that in the current environment, the stocks (or bonds) are too high priced, and you should focus your purchases on another asset class. Relook at it later on, and potentially change your purchases with the new data (I look at it once/year).

My personal belief is that we’re long overdue for at 20%+ drop in stocks. Since most of my investments are automatic with the 401K, I will probably just leave them as is (see current allocation) but I am preparing myself psychologically for a large stock market drop. I guess we will see….

How are you guys doing with the run up?

I’ve had some ups & downs with it, and it has generated roughly 4% in dividends annually – but it hasn’t grown very much. Thus, in this era of growth fund investing and low interest rates, it hasn’t been able to generate the sort of returns necessary for someone to live off of in a long-term retirement. Still, its an interesting experiment, and good to know.

I started it back in 2016, and the fund was setup with 50% bonds, 25% dividend stocks and 25% REITs. After 2-1/2 years, I decided to divest from bonds, because with the low interest rates, they were only paying about 2% in dividends and dragging down the performance of the whole fund. Since then, its been a roughly 50/50 split.

In 2020, I started a “dog of the dow” investment strategy, where you purchase the 10 stocks with the highest yield on the Dow (i.e. their price vs. the dividend they are paying is lower). Its an old time strategy, and I’m not sure how its going to pay off long term. 2020 was a bad year for dividend stocks, but they’ve bounced back.

Now for the 2^nd quarter, we generated a significantly larger amount of dividends, which is fairly typical for 2^nd and 4^th quarters. The value of the fund on July 1 was $138K, so we’ve regained all the ground lost from Covid back in March 2020. For the 2^nd quarter, we coming in around 3.58% with a significantly higher stock valuation. I still don’t think this is a valid strategy for 100% of your retirement funds, I do believe the dividends can provide some value, especially with a solid tax strategy.  

I believe the “jury is still out” on whether the shift to stocks & REITS was a good decision or not. With the current US Fed and its interest rates, I don’t think Bonds will be a good return any time soon – unless you are willing to go into some very risky bonds. If I had additional capital, I might invest more here, as I think these dividend stocks are undervalued.

However, there is “growing” (ha ha) evidence that value stocks are getting ready to make a comeback (similar to what they were after the dot.com bust). You’ve seen me write about value trading in the past, and Kiplinger’s just came out with an article arguing that 2021 might be the year of value stocks.

One of the key arguments of the Kiplinger’s article is that low interest rates have a negative effect on value stocks in comparison to growth stocks (who can use the low interest rates to borrow cheaply and grow faster).

My value stock index fund (VVIAX) has grown an average of 13.54% annually over the last 5 years vs. my S&P Index has growth an average of 17.13% annually over the last 5 years. However, for year-to-datte, it has reversed: Value 18.18% vs S&P 13.84% – even as certain speculative stocks have skyrocketed.

I’d like to think that undervalued stocks (energy, utilities, etc.) are going to do better in the next decade. I’ll continue to put them as part of my portfolio, and I hope you’ll consider them as well.

I’ve had some ups & downs with it, and it has generated roughly 4% in dividends annually – but it hasn’t grown very much. Thus, in this era of growth fund investing and low interest rates, it hasn’t been able to generate the sort of returns necessary for someone to live off of in a long-term retirement. Still, its an interesting experiment, and good to know.

I started it back in 2016, and the fund was setup with 50% bonds, 25% dividend stocks and 25% REITs. After 2-1/2 years, I decided to divest from bonds, because with the low interest rates, they were only paying about 2% in dividends and dragging down the performance of the whole fund. Since then, its been a roughly 50/50 split.

In 2020, I started a “dog of the dow” investment strategy, where you purchase the 10 stocks with the highest yield on the Dow (i.e. their price vs. the dividend they are paying is lower). Its an old time strategy, and I’m not sure how its going to pay off long term. 2020 was a bad year for dividend stocks, but they’ve bounced back.

At the end of 2020, using the “dogs” strategy, I sold off Caterpillar & Pfizer, and purchased Amgen and Coke (they had a higher yield). The value of the fund was only 123K at the end of 2020,  buts it already up to 133K for 2021, while throwing off roughly 3.3% in dividends. Not too shabby!

I believe the “jury is still out” on whether the shift to stocks & REITS was a good decision or not. With the current US Fed and its interest rates, I don’t think Bonds will be a good return any time soon – unless you are willing to go into some very risky bonds. If I had additional capital, I might invest more here, as I think these dividend stocks are undervalued.

The solution to many of these issues is a simple one. As laid out by the Motley Fool, the solution is to use the application to invest, not the try and time the market (i.e. don’t use it to day trade). Robinhood plays up its ease of trading, but its performance in quick trades has been poor. However, its ability to make stock trading easier to start is laudable.

I was thinking about this after reading an article by evidence investor about “Why most robinhood traders get lousy returns.” The article pretty much lays out that people are using it to day trade, not invest for the long-haul, and are thus using having their emotions drive their investing decisions. It’s a good article and worth a read.

I personally don’t use Robinhood. Most of my investments are in mutual funds/ETFs. I gave up stock picking (I sucked at it) and chose just to stick with those. I’ve heard it said that it really doesn’t matter that much getting the optimum return – its getting started with regular investing and sticking with it. In that sense, if Robinhood gets you to do that, it can be a worthwhile option.

Hope your holidays are going well!

The first quarter was somewhat successful (an 18.7% increase in dividend $) but a real bust as far as value (I dropped almost 30% in value) due to the market volatility. If I had kept the bonds, I wouldn’t have dropped as much. As usual, my short-term timing is poor.

For the second quarter, I had to shift my account from my bank (USAA) to Vanguard, because USAA was spinning off their investments to Schwab, and I didn’t want to have my investments in multiple companies (I currently use Vanguard, and Mrs. 39 Months uses TRowePrice). I may have missed a few dividend payments on this, so the numbers are a little suspect. For the 2^nd qtr 2020:

For 2^nd qtr 2019, I received 1,280.21 in dividends on $131,994 of investments – so 2^nd quarter appears to be a “wash.” I’ve managed to gain back about 12% of the value back from the 30% that I lost, but still have a ways to go to build it back up.

Again, if I was using the account to live off the dividends, I could “let it ride” and let the investments build back up, while spending the dividends. I believe the “jury is still out” on whether the shift to stocks & REITS was a good decision or not. With the current US Fed and its interest rates, I don’t think Bonds will be a good return any time soon – unless you are willing to go into some very risky bonds.

Let’s see how 3^rd and 4^th quarter goes.