Passive Investors Will Go Broke!

Investors Alley
Passive Investors Will Go Broke!

Remember the saying, “Everything comes to those who
wait?” Investment gurus lectured us about patience and compounding. They
blared, “Save $100/month, invest at 6% and you will be a millionaire when
you retire.”

Current interest rates make that impossible. 25 years ago, if you
bought US treasuries, the compound interest doubled your money in 12 years.
Using today’s interest rates, it takes well over a century.

Holding bonds and CDs was considered “passive”
investing. When they matured you bought another, collecting money along the
way. A few hours a year managing your money was all it took.

Today, passive investors will eventually go broke!

My wife Jo inherited a portion of the family farm. We set up a
trust so it would be passed down to her daughter. The farm was sold. We bought
CDs; we didn’t want to lose any of that money and we accepted what little
income they provided.

Recently Jo had several 2% CDs mature. I looked at the offerings
and got angry. With such small yield, we will eventually have to tap into
principal to help pay the bills.

I grabbed the current issue of The Dividend Hunter. We discussed
alternatives, risks and potential returns. Electric utilities are unlikely to
go out of business. I searched my online broker looking for those with the top
ratings.

I used $100,000 to keep the math simple. If Jo bought a 5-year CD
she would earn $45.83/month in interest …. whoopee!

Dividend Hunter recommended a fund paying 6.85%. I found two other
top-rated utilities paying 3.18% and 4.89%. One quarterly dividend from the
lowest yielding utility ($795) is more than the annual interest from a CD.

Utility stock prices fluctuate and could go down. Was the
additional income enough to offset the risk?

We did two things. We bought a small portion of all three, and I
contacted Tim Plaehn, editor of The Dividend Hunter. Tim is a member of our
panel of experts, specializing in income-producing investments.

We need to reconsider the investment landscape, both risks and
rewards.

DENNIS: Tim, thank you for your time. I’ve preached about low
interest rates for some time. I’ll admit that graph was a real wakeup call.

Safe, fixed income investors are pretty well screwed. Junk bond
yields are not worth the risk. If they want to grow their wealth, they can’t do
it safely.

Am I missing something? What do you say to people like Jo who are
really afraid of losing money?

TIM: Thanks for inviting me. Dennis, your observations are spot
on.

I was curious about the yield on the Fidelity Government Money
Market Fund. It’s the default sweep account for Fidelity brokerage accounts.
Chances are many of your readers have an account with Fidelity.

I was shocked to see the yield at 0.01%. Yes, one-one-hundredth of
a percent. Put in dollar terms, $1 million in this money market fund will earn
$100 in interest per year… that’s per year. I’m old enough to
remember when it paid 5% ($50,000).

The current investment world does provide opportunities to earn
great yields. The primary trade-off is to understand and be willing to accept
price volatility.

DENNIS: Do you have a “conservative” corner in your
letter? I would imagine a lot of subscribers are very risk-averse.

TIM: Human nature is a funny thing. I am constantly surprised how
aggressive new subscribers often are when picking their first high-yield
investments to buy.

I divide my recommendations list into different risk categories.
One is quite conservative, while still offering investors very attractive
yields. Over the last few months, I’ve increased the number of preferred stocks
on the recommendations list, in addition to a preferred stock ETF we’ve held
for a number of years now.

My readers have a whole report on just the preferred stocks in our
portfolio. Preferreds pay safe and secure dividends. They are called preferred
because this type of share gets preference over common stock shares when
dividends are paid.

DENNIS: The idea of “set it and forget it” just won’t
work. Like it or not, investors must “manage” their investments to
earn decent, safe income. Most people don’t have the skills or want to invest
the time to do so.

How do you deal with these concerns with your subscribers?

TIM: I spend as much time talking to subscribers about portfolio
management as I do about the specific investment recommendations. Just to let
you know, in October I’m running a four-part live Master Class on portfolio
management for dividend investors.

Just like you and Jo, many investors have moved into stocks out of
necessity rather than desire. The yield for passive investors in fixed income
products is terrible. Savers and retirees start looking for other ways to make
their money grow. That usually means the stock market, which for some can feel
complicated and confusing.

Income stocks will do the job with great yields. However, new to
stocks investors often need some guidance on how many for how much investments
to buy. The yields also don’t always indicate the level of risk. I really enjoy
educating my subscribers on how to allocate their money.

DENNIS: You believe in a balanced portfolio, advising readers to
hold cash (or short-term CDs), income-producing investments and holding
precious metals and stocks to offset inflation.

When silver dropped below $13/oz. I bought WPM, a silver royalty
stock. Even with some recent purchases over $50/share, my average cost is
$33.46. They pay a $0.40/share dividend, for a yield a little over 1% at my
cost.

That isn’t much of a dividend, but gold and silver don’t pay
anything.

Is this something you recommend to your subscribers?

TIM: While my focus is on investing for income, I do share ideas
outside of that arena. I also own gold and silver. For me, spreads and
transaction costs have always been a big negative for precious metals.

Investors need to compare prices when buying metals. Online
shopping makes it a bit easier, and it’s worth the time.

DENNIS: One final question. I want to go to the other end of the
spectrum. I wrote two covered calls on part of my WPM stock. The strike prices
were $52.50 and $55.00. The first garnered $1.25/share and the second $1.80. If
they get called, I make even more profit.

Some consider writing covered calls risky. Isn’t it a win if the
stock gets called and a win if it doesn’t?

If it’s not called, I’ll sell another one. The covered call income
is 3-4 times the dividend. Double digit returns are certainly possible.

Tim, I’m not a stock picker, I leave that to experts like you that
have all the proper tools and experience. This is not something for passive
investors, but looks like it has some real potential.

Is this something people should take another look at?

TIM: Thank you for the opportunity to talk to your readers.

I do view covered call writing as the third strategy for the
income focused investors, after high-yield investments and dividend growth
stocks.

Covered call trading takes more education and work, but the
returns can be very attractive. A lot of investors feel options are risky, but
covered calls are the safest way to go. You can do well, but it requires
staying on top of things.

However, let’s not get ahead of ourselves.

Conservative investors like Jo are dipping their toes into the
water and understandably cautious. Accredited investors, like yourself with
plenty of experience see things differently. I’d suggest we defer the covered
call discussion for down the road.

Personally, I’d recommend you and Jo watch the four-part Master
Class together. It’s designed for conservative investors who feel they really
need to learn about stocks and dividends before they invest a lot of their
money.

DENNIS: On behalf of our readers, thanks again for your time.

TIM: My pleasure, Dennis.

People are creatures of habit, and persist in unprofitable behaviors long after they become a liability. – Subscriber Bernard D.

Dennis here. A friend recently remarked, “It used to be that
working and saving was the hard part in building wealth. Now it’s easy compared
to today’s investment challenges. Managing our life savings is now my job,
whether I like it or not.”

Passive investing won’t work anymore. Good yield from safe, fixed
income CDs or bonds no longer exists, probably gone for our lifetime. It’s time
to get on with the job and make our money grow safely!

That means we need to take measured risk in the stock market.
That’s something Tim’s an expert at with his newsletter. I’ve been a subscriber
to his Dividend Hunter for several years now.

I suggest you investigate how his service works to make growing
and managing your savings a whole lot easier. Tim has offered our readers a
terrific discount.

Tim has recently shown his subscribers how his portfolio works to
deliver an 8%+ yield. It’s so easy to get started and he explains everything in
plain English. Click HERE to
check out the details.

I’m excited Tim is going to be offering a new Master Class on
managing your portfolio for new dividend investors. I’ll keep readers posted on
when it is available. Jo and I will be watching.

FREE: 10 Easy Steps To The Ultimate Worry-Free Retirement Plan

Most financial education is written by those promoting their financial products or services. Don’t be fooled! “Set it and forget it” is a trap. Retirement planning is not an event; it’s an ongoing process. Request your free copy of the latest planner from retirement expert Dennis Miller. Click here.

 

Passive Investors Will Go Broke!
Dennis Miller