Common Investing Myths
Common investing myths. Investing is a topic that many people like to talk about. Indeed, investing is much like sports, there is a lot of people who are armchair quarterbacks who would have done it differently and better. But there are more parallels than that and you can read my article on how investing and sports are similar. Beyond that, there is also the fact that both sports and investing have myths. These myths often have a strong hold on the psyche of investors. Let’s take a look at a few of these and dispel them.
Common Investing Myth No. 1 – Saving is Investing
Many people think that if they are saving then they are investing. But that is not the case and the two are fundamentally different in how you deal with your money. Furthermore, the mindset of these two activities are different. Saving is an inherently pessimistic activity where you save for an uncertain future. On the other hand, investing is more optimistic, and you are investing for a more hopeful future.
Saving is the difference between your earnings and expenses and assuming that you put the money into an interest-bearing account. So, if you earn $50,000 and have $40,000 in expenses then you are saving $10,000. If you put this money in a savings account today you are not earning much interest on it due to low interest rates. However, your initial investment is often thought of as safe in an FDIC-insured account such as a regular savings account or CD.
Investing is an act where you put your savings into an asset that can appreciate or depreciate. Your initial investment or principal is at risk. FINRA has even defined investment risk for you. “Risk is any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare.” For instance, if I were to buy 100 shares of Starbucks (SBUX) or Nike (NKE), the price of those 100 shares can grow or fall. The same holds true for other asset classes including bonds, real estate, gold, REITs, cryptocurrencies, etc.
If your initial investment can decline, then why do you invest? It comes down to the risk versus reward tradeoff. Higher risk comes with the higher return expectations. Over periods of times stocks are expected to outperform less risky investments like cash or even U.S. Treasuries. Hence, you now see why saving and investing are different.
Common Investing Myth No. 2 – Investing Should be Exciting
Investors are human and think that investing should be fast-paced, fun and exciting. Many day traders seem to like the ups and downs of trusting their gut much like winning and losing in the casino. Maybe that is OK for some, but many people lose money. For the great majority of us, investing should be boring like a slow-and-steady horse plodding along. It is not exciting, but eventually it gets there. That is why I like dividend growth investing and even indexing. They are simple to understand, and you do not need access to real-time data. I have written previously on the advantages and risks of dividend growth investing. It is a good place to start if you are unsure about dividend growth investing. Can this work? I have personally interviewed investors who have become millionaires using dividend growth investing or even indexing and have essentially achieved FIRE. Being patient and disciplined with a plan can work.
Common Investing Myth No. 3 – Buy When Prices Are Declining
For some reason, some investors think that they should buy when prices are declining. Yes, it does make sense to buy in dips, especially if you are dollar cost averaging. But declining stock prices can always go lower, particularly in a bear market or during times of financial distress. I can also think of many individual stock examples when this happened. Which ones come to mind: Enron, MCI Worldcom, Washington Mutual, Lehman Brothers, Bear Stearns, Sears, JCPenny, Kodak, etc. Even profitable companies can have a declining stock price over an extended period of time because of consistently lower revenues or earnings such as Occidental Petroleum (OXY), Exxon Mobil (XOM), GE (GE), International Business Machines (IBM), and others.
I think it makes much more sense to buy when a stock is undervalued rather solely based on declining prices. For that reasons you can investing in bull and bear markets makes sense. Valuation is a separate topic and I have written about one method known as the Gordon Growth Model. However, the simple price-to-earnings ratio works for many too. If a stock with growing revenue and earnings faces a temporary headwind it may be reflected in the valuation and the earnings multiple. At that point, it is time to do some research to see if the stock actually fits your investment criteria.
I have covered three common investing myths, but there are many more. Some are simple but others are perhaps more complex. I will discuss those in future articles. Thanks for reading common investing myths.
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Chart or Table of the Week
This week I highlight Pfizer (PFE), the pharmaceutical giant. The company is in the news because of its COVID-19 vaccine. Besides that, the stock should be in your radar as a dividend growth stock that is yielding approximately 4.5%. Pfizer has not done well in the past two years. The stock was in the Dogs of the Dow 2020 before it was removed from the Dow 30 list. The screenshot below from Stock Rover* shows the trailing yield and dividend growth for Pfizer in the past decade. Clearly, the yield is at the higher end of its range. Consensus adjusted earnings for 2021 is $3.36 giving a forward P/E ratio of 10.3X. The annual dividend of $1.56 per share gives a payout ratio of 46.4%.
Dividend Increases and Reinstatements
T. Rowe Price (TROW) increased the dividend 20% to $1.08 per share quarterly. The forward yield is 2.6%. This is the 35th consecutive yearly increase. T. Rowe Price is a Dividend Aristocrat and Dividend Champion.
Eversource Energy (ES) increased the dividend 6.3% to $0.6025 per share quarterly. The forward yield is 2.8%. This is the 21st straight annual increase. Eversource is a Dividend Contender.
Sonoco Products (SON) hiked the dividend 4.7% to $0.45 per share quarterly. The forward yield is 3.0%. This is the 11th consecutive yearly increase. Sonoco is a Dividend Contender.
United Parcel Service (UPS) raised the dividend 1% to $1.02 per share quarterly. The forward yield is 2.4%. This is the 21st yearly increase in a row. Eversource is a Dividend Contender. I have previously published an in depth article on United Parcel Service.
Robert Half International (RHI) increased the dividend 11.8% to $0.38 per share quarterly. The forward yield is 2.1%. This is the 16th consecutive yearly increase. Robert Half is a Dividend Contender.
Restaurant Brands International (QSR) hiked the dividend 1.9% to $0.53 per share quarterly. The forward yield is 3.5%. This is the 5th straight annual increase. Restaurant Brands is a Dividend Challenger.
NorthWestern Corporation (NWE) raised the dividend 3.3% to $0.62 per share quarterly. The forward yield is 4.3%. This is the 15th consecutive yearly increase. NorthWestern is a Dividend Contender.
Vulcan Materials (VMC) increased the dividend 8.8% to $0.37 per share quarterly. The forward yield is 0.9%. This is the 7th straight annual increase. Vulcan Matrerials is a Dividend Challenger.
Dividend Cuts and Suspensions List
I updated my dividend cuts and suspensions list two weeks ago. The number of companies on the list has risen to 511. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.
No new companies were added to the list in the past week.
No missed companies were added to the list.
Dow Jones Industrial Averages (DJIA): 31,459 (+1.00%)
NASDAQ: 134,095 (+1.72%)
S&P 500: 3,935 (+1.24%)
The S&P 500 is trading at a price-to-earnings ratio of 30.01X and the Schiller P/E Ratio is at about 35.8X. These two metrics are down about one point this past week. Note that the long-term means of these two ratios are 15.8X and 16.7X, respectively. I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued. Note that we are at 40X and approaching valuation levels near the top of the dot-com era.
S&P 500 PE Ratio
Shiller PE Ratio
Stock Market Volatility – CBOE VIX
The CBOE VIX measuring volatility dropped almost a full percentage point this past week to 19.97. Two weeks ago, the VIX was at 33.09. The long-term average is approximately 19 to 20. So, at this point we are at the long-term average, which is essentially the first time since the COVID-19 pandemic started.
Fear & Greed Index
I also track the Fear & Greed Index. The index is now in Greed at a value of 63, up 3 points from last week. This is after plunging into Fear two weeks ago.
There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.
Market Momentum is indicating Extreme Greed. The S&P 500 is 10.08% over its 125-day average. This is further above the average than normal over the past two years.
Stock Price Breadth is indicating Extreme Greed as advancing volume is 14.42% more than declining volume on the NYSE. This is upper end of its range over the past two years.
Junk Bond Demand is indicating Extreme Greed. Investors are accepting 2.13% yield over investment grade corporate bonds. The spread is down from recent levels indicating that investors are taking on more risk.
Stock Price Strength is signaling Greed. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the upper end of its range.
Market Volatility is set at Neutral. The CBOE VIX reading of 19.97 is a neutral reading.
Safe Haven Demand is in Fear. Stocks have outperformed bonds by 4.00% over the past 20 trading days. This is typical over the past 2-years.
Put and Call Options are signaling Extreme Fear. In the last five trading days, put option volume has lagged call option volume by 51.87%. This is amongst the highest level of put buying in the past two years.
The number of weekly new unemployment claims were up with last week at 793,000. This is down 19,000 from last week’s revised numbers. The 4-week moving average has been consistently above 800,000 for many weeks.
For some perspective, one-year ago weekly unemployment claims were only about 204,000. Currently we are 3X – 4X the normal level. The seasonally adjusted insured unemployment rate was 3.2%.
The ten states with the highest unemployment rates for the week ending January 23 were in Pennsylvania (6.8), Alaska (6.4), Kansas (6.1), Nevada (6.1), Rhode Island (5.6), Illinois (5.5), Connecticut (5.4), the Virgin Islands (5.4), Massachusetts (5.3), and New Mexico (5.2).
The Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS showed job openings were little changed in December, increasing slightly to 6.65 million, over 6.57 million in November. Hiring dropped to 5.54 million from 5.94 million, in addition, the pace of hiring declined to 3.9% from 4.2%. Much of the decline was in accommodation and food services (-221,000); transportation, warehousing, and utilities (-133,000); and arts, entertainment, and recreation (-82,000). For the 2020 calendar year, hires totaled 70.2 million and separations totaled 75.7 million, yielding a net loss of 5.5 million jobs.
The Bureau of Labor Statistics reports the January CPI MoM increased to a seasonally adjusted 0.3% in January. Most of the increase was attributed to the gas index which rose 7.4%. While the energy index rose 3.5%, the food index increased slightly by 0.1%. The January CPI YoY came in at 1.40%, an increase from 1.36% in December. The Core CPI MoM (ex-food and energy) was unchanged in January. The Core CPI YoY, (ex-food and energy) came in at 1.41%, a decrease from 1.62% in December. Among the indexes that increased were used cars and trucks +10.0% and medical care +1.9%. Among the indexes that declined were airfares -23.1% and motor vehicle insurance -3.7%.
Federal Reserve Chair Jerome Powell said the U.S. job market remains a long way from a full recovery, indicating the real unemployment rate is closer to 10%. The Fed chair emphasized that monetary policy would remain very supportive of the economy, stressing the importance of low-interest rates. Powell said, “We will not tighten monetary policy solely in response to a strong labor market”. He also played down the risk of inflation saying he doesn’t expect “a large nor sustained” increase in inflation.
Thanks for reading about Common Investing Myths – Dividend Power Week in Review!
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.