The rising rate is the all the rage in the investment community these days.
It is clearly not good for stocks at a high level – with rising rates, the discount rate to discount future cash flows goes up – so net present value of future cash flow goes down theoretically.
Practically, stocks become less exciting vs. safer assets like debt instruments. Also many people own stocks with debt – when their cost of financing goes up (sadly margin loans have floating rates), the cost of owning stocks on leverage also rises – triggering sales in the stock.
Most of the times, it would be safe to sell stocks and reallocate that capital into current income flowing assets.
However, this time – we have ANOTHER VARIABLE – WE ARE IN HYPER-INFLATIONARY ENVIRONMENT – WHICH MAKES HOLDING CASH MORE EXPENSIVE – this necessitates continuous investing into assets DESPITE KNOWING RATES ARE GOING UP.
After much thinking, I have significantly increased real estate holding, which can be financed with significant amount debt on fixed rate (under 3%).
At the same time, I got cash coming in every month (I have a day job) and I had to figure out how to allocate that capital.
One would say.. why don’t you pay down debt? I don’t want to pay down debt because my debt interest rate is BELOW inflation rate – effectively the real rate is POSITIVE (I.E. I am making money)
FOR INSTANCE, MY MORTGAGE RATE IS 3% – INFLATION IS 8% = the real rate is +5% – as in.. bank is paying ME 5% to hold onto the loan.
Anyways – with excess cash flow, I would not be paying down the debt – I am reinvesting the excess cashflow into other cash flowing assets.
After much thoughts, I decided to allocate more capital into $VYM – high dividend yield ETF after reading great presentation from GLOBAL X.
To make your life easier – below are key slides and takeaways
They looked at 58 YEARS OF MONTHLY DATA FROM 1960 TO 2017
50% OF RETURN CAME FROM DIVIDEND – THEREFORE THEY PROVIDE RELATIVELY LOW CORRELATED RETURN TO THE STOCK MARKET
There were some drawdowns, but they provided significant outperformance over time – note that orange line (dividend stocks) never dipped below the blue line (S&P500).
Below is the money slide – during the rising environment, dividend stocks did not just outperform – their prices WENT UP ON ABSOLUTE BASIS in 7 out of 10 times!
To me, I think the answer is clear – need to find high dividend yield stocks (or ETFs if you can’t invest in single stocks – like myself). Taking a basket approach through ETF is the way for me as I don’t have time to build a portfolio based on fundamentals.
How are you planning to invest through the current environment of HIGH INFLATION + RATE RISING ENVIRONMENT? Please comment below!
*not investment advice
You can find full slides in the below.
