Making Use of Yields in Recessions
For the last several decades, investors have relied heavily on asset and equity growth in the market to improve personal finances. We’ve all watched as tech stocks with extremely high growth rates have controlled the markets, ballooning the wealth of those that bought into their stocks before their historic rises. But now that the markets are more volatile and the threat of a recession is looming, how safe do you feel having substantial portions of your wealth in these stocks? How would you feel if a 5% or 10% drop happened tomorrow? Would this be a significant setback to your retirement? Are you confident in your assets’ ability to reliably pay your bills?
Yields and Compound Interest
We all know by now that stocks in high-growth sectors tend to grow at rates faster than others, with constant double-digit growth making concerns over dividends and their percentage yields nonexistent. But the markets have shifted, and protecting your portfolio means taking a second look at the value brought to your financial plan with yields and their compounding interest rates.
If $100 is invested into an asset that has a 10% interest/dividend rate, that value will become $110 at the end of the first period. If reinvested, that amount will become $121, and so on. However, the regular stock chart will not show this. The chart will show the general dividend yield as well as some, typically, modest growth of about 2%.
To see the true growth of your investment, you will add your dividend percentage to the end of payment period stock price.
Yield Traps
Not all yielding assets are created equally. Though they often do not see declines comparable to stocks in high-growth sectors, allowing your portfolio to maintain value during bouts of economic downturn, you must be wary of the likelihood of becoming involved in a yield trap.
Yield traps involve assets with double-digit dividend yields that also see frequent, steep, declines. Though the dividend rate is high, investors can end up losing money instead of making money.
Another form of yield trap involves stocks whose most recent dividend payments were larger than normal, painting a picture of a higher percentage yield than will actually be plausible in the future. Being aware of an asset’s dividend history and payment reliability will stop you from investing in a high-paying stock that will soon decline in performance.
Deciding which assets to invest your hard-earned retirement savings into can be a daunting and stressful decision. To schedule a complimentary financial review with Moore’s Wealth Management, click here or call our office at 770-535-5000, where a staff-member is awaiting your call Monday through Friday, 9AM to 5PM.
Source: Rediscovering the Value of Yields in Recessions
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
