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 who 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 in 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 the payment period’s 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 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, 9 AM to 5 PM.
All information contained herein is derived from sources deemed to be reliable, but cannot be guaranteed. This material is provided as a courtesy and for educational purposes only.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
Equity securities may fluctuate in response to news on companies, industries, market conditions ,and the general economic environment. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease, or totally eliminate their dividends without notice.
Steward Partners, its affiliates, and its Financial Advisors do not offer tax or legal advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
This article may contain links to articles or other information that may be on a third-party website. Steward Partners does not imply an affiliation, sponsorship, endorsement with/of the third party or that any monitoring is being done by Steward Partners of any information contained within the linked site; nor do we guarantee its accuracy or completeness. Steward Partners is not responsible for the information contained on the third-party website or the use of or inability to use such site.
