Preparing for a Stock Market Correction

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

I have observed investors for many years. The current bull market has been hated a lot, based on my observations with investors. I have often heard from someone that they are accumulating cash “because the market is too high” for 8 years in a row now. Some of these investors may have realized that it is difficult to find many quality companies available at bargain prices. I understand their frustration, because it has gotten really difficult to find quality companies to buy.

However, some have taken this frustration, and sold their stocks. The rationale for selling includes the fact that many stocks are very overvalued. Unfortunately, this is not a good rationale. Stocks can continue to stay overvalued for a while. On the other hand, the companies may appear to be overvalued because of short-term weakness or one-time events. If earnings were to rebound, stock prices may end up appearing fairly valued. Some recent headwinds faced by US companies include the strong dollar, which hurts foreign profits. Another includes the low oil price, which has depressed earnings in the energy sector.

What are your investment goals?

My investing goals are very simple – to cover my expenses from dividend income generated from my portfolio. In order to translate goals into reality however, it is important to walk through, and think through the steps it would take to achieve them. Without more specific action plans, goals remain pipe dreams.

For example, I will need $1,000,000 to invest today, if I needed $30,000 in dividend income, and the average opportunity I could find yielded 3%.

Few people have $1 million in savings just laying around however.

If I broke down that savings goal into smaller and more manageable action steps however, this gargantuan task of achieving financial independence might not seem so impossible. In the case of investing for retirement, the important inputs within the control of the investor include the amount of money they can allocate each period, the amount of costs they incur. The other important inputs include time that this money needs to compound for through dividend reinvestment, the rates at which the capital is invested and reinvested.

Altria Delivers Dependable Dividend Growth and High Total Returns

Altria Group, Inc.(MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States.

The company recently raised its quarterly dividend by 7.80% to 61 cents/share. Altria has delivered dependable dividend increases for 47 years in a row. In the past decade, this dividend champion has managed to boost distributions at a rate of 8.40%/year.

This dividend growth stock has delivered dependable dividend growth, and exceptional total returns to shareholders for decades. In fact, the company managed to become the best performing stock in the S&P 500 between 1957 and 2003.

Since then, the company spun-off Kraft foods in 2007 and Phillip Morris International in 2008. Kraft foods was further split into two companies in 2013 – Mondelez and Kraft. The latter merged with Heinz to form Kraft Heinz (KHC). An investor who bought Altria in 2003, and held on to all spin-offs, while reinvesting dividends, still managed to do much better than the S&P 500.

How to set up your own perpetual income machine

Every dollar that you have in your possession can be traced back to you exchanging your labor for money. The labor you provided was essentially a time commitment on your part to an employer or clients. Therefore, every dollar you own, is essentially a unit of time you spent to acquire it. The problem with this type of exchange is that in order for you to earn more dollars, you need to either spend more time doing work. Therefore, your ability to earn income is limited by the amount of time you have. This is where you may decide you may need to create a perpetual income machine. This perpetual income machine would produce earnings, without much labor effort and without requiring you to show up to a specific location for a scheduled period of time every day. With the passive income generated from this income machine, you are essentially buying time.

This perpetual income machine would produce income to you, which would likely grow above the rate of inflation, and therefore would maintain your standard of living. This of course is much more than what the average American has been receiving in raises over the past six years. All of the corporations I have worked over the past six - eight years have been characterized by increase in responsibilities for employees, increase in hours they have to exchange for the same pay, meager or non-existent pay raises, and higher levels of stress. It is no wonder that so many are dissatisfied with their jobs, and want to retire early to pursue their passions. In this article, I would discuss how I am planning to earn income without having to exchange labor for money, by setting up my perpetual income machine.

How Dividend Growth Investors can prosper even if interest rates increase

Last week, I wrote a groundbreaking article, which outlined the basic premise that interest rate levels affect P/E ratios that investors are willing to pay for stocks. I also made the call that even at a P/E of 20, stocks are cheaper relative to bonds, and could withstand doubling or tripling of the interest rates, while still remaining more attractive, relative to bonds. So there is some margin of safety in common stocks today, relative to bonds.

The only way that bonds do better than stocks over the next ten or twenty years is if we get deflation, and we experience a situation that is similar to Japan between 1990 - 2016 or US between 1929 - 1933. Just to be on the safe side, when I discuss bonds or fixed income, I want you to know that I mean long-term US Treasuries.

The interesting part is that a lot of pundits have been expecting higher interest rates in the US for the past 8 years. Their train of thought has always been that these rising interest rates will potentially reduce the demand and prices for stocks, and dividend stocks in particular. A lot of investors have been deceived by this train of thought.

These pundits have been wrong for 8 – 9 years in a row. Interest rates have been declining, and stocks have been rising. Unfortunately, many companies are selling above 20 times earnings these days.