Dividends- Getting Paid to Hold

(Dripping Dividends and compounding  is core part of my risk management strategy.)

If you noticed, S&P 500 has not budged between Aug 2018 to Aug 2019.   We also had a lost decade between 2000 and 2012 while Japan has had 3 decades lost.  It's not inconceivable the U.S. markets will see another period of sideways action.

Overall profit even with a 12 year price loss.  PCQ was my favorite fund which
I sadly sold as PCQ is so overvalued right now. I so miss you PCQ.

What's this hot stock to beat the SPY S&P 500 during the lost decade? PCQ is a California muni fund.  You can see the actual stock price PCQ went down significantly from $22.69 to $15.05 in 12 years but overall came out much better than SPY due to its ~5-6% interest payments which reduces capital losses as a risk strategy.  Still $4000 in 12 years is terrible return but better than losing money and more than double the S&P return.    Of course you can win any argument cherry picking the dates, but income generating assets in a sideways markets has proven to me a better return than growth indices. The regular payments which if they are dripped are of critical importance as you get the virtuous double benefits of compounding and dollar cost averaging as the above chart amply shows. Actually you should have been lucky at all even to be in SPY as see Nasdaq ETF QQQ:

You might counter with- how about now! Surely tech has more than amply recovered no? Lets go with the trusty QQQ which I sadly have sworn off never to touch ever since the dot com bubble. What's wrong with the below chart. Is this even correct, hasn't Nasdaq has been in a 8-10 fold rise for 20 years? This totally can't be true... Well it is true if you bought at the top of 2000 which a lot of people including me did. It's still shocking to me that Intel never recovered their 2000 high price.

These charts while true do not match our assumptions that tech should have massively outperformed
just a California muni in the last 20 years.  Only when you don't compound the dividend, tech will win.
So the moral of the story is is DRIP.

You can see in the second chart that dripping is critical as $10K of PCQ returns come from  compounding and dollar cost averaging. The Nasdaq definitely was impossibly irrationally overvalued compared to the general market equities now.

I'm 110% my financial market assets will decline in the coming recession. If we have a side ways market which I am expecting, I absolutely want to get paid regularly and DRIP while waiting to bump by returns.

We alas are no longer in that bygone era where being in all cash at least gave you the comfort of 4% interest in safe investments like CD and treasuries so you have widen your field considerably. I never in my life thought I'd be looking at MLPs and BDCs but I didn't think we would have low interest rates for so long and given negative interest rates in Europe, I should definitely be prepared to see lower rates for longer.

Currently, these are the currently accessible income generating assets in the financial markets with my preferred vehicles in green:

• bond funds  - Currently overweight. See full post on Wild and Wooly World of Bonds
• govt - beware of bond bubble in treasuries
• municipal - overweight due to usefulness to society. some high yield tolerable
• corporate - favor high quality and ultrashort duration
• agency- some MBS
• preferred stocks- Relevant for non-growth era for high yield and more stable stock price. I currently hold individual preferred shares which sometimes can be bought at favorable price at the IPO as well as CEFs.
• dividend generating equities/funds
• closed end funds- CEFs which cover all areas mutual funds cover tend to payout high dividends due to use of leverage up to 40%. So a muni CEF can pay 1.4X higher return than a mutual muni fund.
• hybrid vehicles- mixing equities, bonds, derivatives to hedge risk
• REITS- attractive dividends. This space is diverse and some sectors are at a discount. I will be filling in detailed posts on REITs later.
• utilities & infrastructure-  currently adding phase, it's overvalued so I have them on watchlist before adding more 
• MLPs - It's been a disastrous 5 years since the fracking boom and bust. Being a carbon polluting investment, it should be off my list.
• BDCs- Still studying, but weary of higher risk 

Above the 3, I am currently overweight municipal bonds, preferred, REITs, and infrastructure utilities.  In this post I just wanted to show readers the benefits of dividends even while the underlying asset is declining severely as a risk management strategy.  I will be filling in detailed posts on REITs later.