Keep Your Income Tools Sharp for Choppy Markets

As the S&P 500 continues to set new record highs, the idea that markets will continue to go higher forever seems to gain momentum. But then we get hit with weeks like last week.

Source: StockCharts

By Friday, the S&P 500 had dropped 2.7% and erased all its gains for the previous 30 days. It was a different mood on Monday as over half of those losses were recovered. This was despite no real resolution to the tariff/export control standoff with China.

On top of geopolitical uncertainty, earnings season just kicked off. The big banks typically set the tone, and analysts are prepared for the huge amount of data that gets dumped into the markets. Always remember that the market tends to latch onto optimism more than pessimism.

I believe we’ll see another quarter where analysts and investors sweep negative news under the rug as long as there is something optimistic to grab ahold of. It’s a recipe for the market to run higher through the end of the year, or at least until our Commander in Chief says something to temporarily slam the market in the other direction.

We need to stay prepared for a potential game of market ping-pong. Our heads could be bobbing up and down to the beat of a seesaw market. 

Already Ahead of the Game

The most important tool in a volatile market is dividends. Since you’re here, you already have this one covered. And dividends are a dual-purpose tool.

First, we will keep collecting dividends through market fluctuations. If you only look at share price gains it makes you entirely dependent on the market’s movements. Of course, we want higher share prices when we sell our positions. However, collecting dividends means our accounts keep growing while the markets move.

Second, stocks that pay dividends tend to be less volatile. This doesn’t mean they won’t move with the markets, but they often move less. The ability to pay a consistent and increasing dividend with a sustainable payout ratio is a sign of a healthy balance sheet.

This is especially true for companies with multi-decade dividend track records through bull and bear markets and high and low interest rates. No matter what the macroeconomy threw at them, they continued to grow earnings and reward shareholders.

Overall, a dividend strategy is very low maintenance. Your money works for you without constant supervision. However, there are a few tweaks you can make here and there, especially when markets turn volatile.

Sharpen Your Tools

1.      Have A Plan to Lock In Gains

I will always argue it’s harder to know when to sell a stock than it is to buy. That is doubly true when markets keep ripping higher. Why sell today when you could sell higher tomorrow? It’s incredibly easy to get caught up in the fear-of-missing-out (FOMO).

A good way to look at big gains in a stock is in terms of prepaid dividends. For example, if you were happy collecting a 4% annual yield from a company, and your shares are up 40%, selling would be pocketing the next 10 years of dividends today. Selling is a way to “fast forward” your dividends!

2.      Create Bonus Dividends

One side effect of last week’s market dive was the VIX jumped to over 20!

Source: StockCharts

The VIX index measures the volatility in the market based on options premiums for the next 30 days. I’ve talked about options here before. Option contracts are based on a block of 100 shares of an underlying stock and allow investors to hedge or speculate with less upfront capital.

Just like a stock trade, an option trade has a buyer and a seller. Acting as the seller allows you to collect a premium from the trade. I see the premium as an extra dividend payment on your position.

Option trades are more nuanced than stock trades. But once you learn the strategy, you can collect income from stocks with no dividend as long as you own 100 shares.

We’ve sold three covered calls so far in Yield Shark and will continue to do so whenever the VIX spikes. My special report detailing exactly how to use this strategy is available to all Yield Shark members, which you can test drive with our money-back guarantee.

3.      Tailor Your Portfolio to Maximize Your Goals

Dividend investing might be a low maintenance strategy, but you still want the best portfolio weightings to maximize your personal goals at every life stage.

Bedrock Income positions are great for reinvesting your dividends and building long-term wealth. Current Yield positions can help you generate bigger streams of income today.

The general rule is to calculate the income you need today. Then build a portfolio of your favorite stocks from the two categories that meet your goals.

If you want more guidance on constructing a dividend portfolio, I’m going to do something next week that I’ve never done before. I’m going to give specific examples of portfolio weightings at various life stages that you can use as guidance.

That’s the whole idea behind my October 22 live event titled Boring Is Better. It’s a common belief that dividends are just for retirees. Wrong! They are for anyone who wants to build wealth and generate income without devoting a lot of time to do so. With just a few tweaks, a well-designed dividend portfolio enables your money to work for you at age 21 and at age 100. 

I’ll go through everything live at 2pm ET on Zoom or live on YouTube. Plus, unlike our July event, I will leave time for your questions. If you can’t attend, feel free to submit your questions ahead of time here.

Kelly Green

P.S. You don’t have to be an active Dividend Digest reader to attend this live stream. Feel free to share the event link with anyone you think would be interested. See you next week!