Dividend Stock vs Growth Stock
Dividend stocks are stocks that pay you a share of company profits, usually every quarter. They are generally mature companies but not ones with a lot of growth potential. Growth stocks are newer and have a better chance of expanding rapidly and paying you for the risk of investing in a new company. However, dividend stocks can grow as well and growth stocks tend to offer dividends as the companies mature. Investors who do not want to pay taxes on their investments often choose growth stocks while retirees who need income commonly choose dividend stocks.
Tradeoff Between Dividends and Growth
Investors who focus on growth stocks are looking for companies that will grow rapidly. Investors who focus on dividend stocks are looking for security and cash flow. Growth stock investors accept risk in return for growth potential and dividend investors accept a slow rate of growth in return for income and safe investments. Young investors generally focus on growth and pivot to security and dividends as they approach retirement. While you are in your earning years, you generally do not want to be paying taxes on dividends but when you are retired and in a low tax bracket, the taxes are not so painful.
Best US Dividend Growth Stocks
You do not need to necessarily choose between dividends and growth. A good example is Apple, which resumed paying dividends in 2012 and has increased its dividends yearly ever since. At its peak in 2012, Apple traded for $25 a share. Today it trades for $117 a share. The stock split 7 for 1 in 2014 and 4 for 1 in August of 2020. Another choice is Home Depot which has paid dividends for thirty years, has a 2.3 dividend yield, and has grown from a $27 stock in 2010 to a $283 stock today.
Buying Protection With a Dividend Growth Strategy
When looking for dividend stocks, look for companies that have increased their dividends over the years. This tells you that the company is growing and is rewarding investors who stay the course. Dividend companies that increase their dividends over the years are making money, covering expenses, growing, and have healthy cash flow. This is a somewhat backward look at intrinsic stock value. These companies have strong product and service lines, manage their businesses well, and are likely to continue to grow and increase dividends for years to come.
Countering Slow Dividend Growth
When dividend growth is slow in your portfolio it is often slow across most dividend-paying stocks. If, like many investors, you are invested in a fund that tracks the S&P you might consider switching to a dividend-focused ETF such as iShares Select Dividend, SPDR S&P Dividend, or Wisdom Tree Total Dividend. If you are comfortable with choosing individual investments, consider the likes of Home Depot or Apple for their growth plus dividends. Alternatively, young investors who don’t rely that much on dividend income may simply choose to focus on pure growth stocks and forget the dividends.
Deep Value Dividend Growth Portfolio
Dividend growth stocks not only provide a quarterly dividend but tend to increase that dividend year by year. And, more importantly, they tend to outperform the market as a whole. Add to this the fact that such companies tend to be very secure investments. Seeking Alpha suggests a deep value dividend growth portfolio and provides specific investing options. Recent additions are UNH, MSM, and UPS. Their collection of stocks in this portfolio has been outperforming the S&P 500 by about 6% in the short term and is likely to continue this over the longer term.
Difference Between Direct Growth and Direct Dividend
Mutual funds offer various options in regard to dividends and growth. A direct growth plan focuses on growth stocks and cuts out the middle man so that your expenses are less. However, you will need to do all of the documentation that would otherwise be done by the mutual fund. In the case of a direct dividend plan you also cut out expenses compared to a regular plan but also need to complete all of the documentation required. In both cases you will decide whether or not to invest dividends and how to deal with things like mergers and takeovers.
Mutual Fund Growth vs Dividend Plan
In a mutual fund, you invest your money and choose an option. Then the fund follows your instructions in regard to the investments. When you choose a growth plan, they pick stocks with growth potential and if these include dividend stocks, the dividends are reinvested. But, if you choose a dividend plan, they will pick all dividend stocks and pay you dividends on a quarterly basis. If dividends are reinvested or if they are paid out, you will owe taxes on the dividends. In general, younger investors will go with growth plans and those nearing or in retirement will choose a dividend plan.
Double Top Investment Risk Signal
The stock market has largely recovered while the Covid-19 pandemic has driven the US economy down. A recent double peak investment risk signal warns of a coming market crash or correction. The double top or double peak is an extremely bearish technical reversal pattern according to Investopedia. By itself, it is not enough to guarantee a market correction or crash, but along with a market that is ignoring the economy, the Covid-19 crisis that is likely to worsen before improving, and uncertain market sentiment, it is a warning sign to be heeded. It is especially of note that the Fed chairman is repeating his comments about congress needing to act on more stimulus measures as the Fed can only do so much.
Double Top Investment Risk Signal
On the basis of the recent double top signal and the many other factors affecting the economy and the market, Forbes predicts a severe October selloff. They provide a long list of things to worry about including the flu season on top of Covid-19, increasing layoffs, the end of stimulus support money, the inability of the Fed to carry the day all by itself, banks expecting a prolonged recession, overvaluation of big tech stocks, and whole industries expecting the need to go into survival mode. Their advice is to hold cash and see what happens.
On top of all this, the level of global debt is dangerous. Without a healthy global economy to service debts, there is a danger of the credit system collapsing across the globe. When this happens, trade will grind to a standstill and we could be looking at a prolonged “L-shaped” economic recovery.
How Bad Will the Correction Be?
The stock market has gotten detached from fundamentals and is overpriced. When market sentiment swings to the negative, it could precipitate a substantial downturn. Although fundamentals are always the cause of crashes and technical signals like the double top help predict them, it can be something otherwise insignificant that starts the ball rolling. Once that happens it would not be surprising to see the market fall as badly as it did at the onset of the Covid-19 crisis and not recover as well as the Senate is opposed to any more stimulus measures.
How Long Will the Correction Last?
Our concern is that when the next correction occurs, the recovery may take a long time. If we fall into bear market territory, the recovery could resemble that of the 1929 to 1932 crash and not the Financial Crisis. It should be noted that the US economy and market did not really come out of the Great Depression until the government ramped up spending (and borrowing) to fight World War II. US infrastructure improvements from roads and bridges to airports to a 5G network upgrade are all necessary and long past due. The way out of the Covid-19 driven recession will be to get the virus under control and then start borrowing and spending to fix infrastructure. The improvements will help the economy and the job created will put money at the hands of consumers from where it will drive a recovery.
In the meantime, beware and consider converting some of your market gains to cash.
Your Investments and the US Economy
Although the US economy has come back a bit from the early days of the Covid-19 recession, it has a way to go. It is time to consider your investments and the US economy. How long will the Covid-19 pandemic last? Will central banks and governments continue to support credit and send stimulus payments? And, how will the combination of virus-induced recession, recovery measures and the state of the US economy affect your investments?
Investing During a Long Recession
Although things look better than they did when the virus first shut down the world economy, there is a long way to go to a complete recovery. The International Monetary Fund predicts only partial and uneven economic recovery into 2021. They note that things have not gotten worse because of “extraordinary” measures taken.
We have reached this point, largely because of extraordinary policy measures that put a floor under the world economy. Governments have provided around $12 trillion in fiscal support to households and firms. And unprecedented monetary policy actions have maintained the flow of credit, helping millions of firms to stay in business.
The four key measures that will be necessary to sustain and propel a recovery going forward are these:
Continuing the fight against Covid-19
Avoiding a premature drawback in stimulus measures
Institution of forward-thinking economic policies
Support of indebted countries, states, and municipalities
The relationship between your investments and the US economy will depend largely on how successful the fight is going forward.
Federal Stimulus Measures and Your Investments
Market Watch looks at the US economy and sees a risk of a setback.
The U.S. likely grew at a record 30%-plus annual pace in the third quarter, recovering much of the historic damage caused by the coronavirus pandemic in the spring.
But, many are worried.
Many are increasingly worried the economy will suffer another lapse, pointing to a fresh round of corporate layoffs and an uptick in coronavirus cases just as the fall flu season gets underway. A slew of companies led by Disney DIS, -0.85%, American Airlines AAL, 1.15% and others have said they will cut thousands of jobs without any more aid.
Consumer spending, the lifeblood of the economy, would be in danger of faltering again if unemployment rises or people are prevented by the virus from going back to work, they say. And if consumer spending goes, so does the economy.
The initial stimulus payments, combined with historic efforts by the Federal Reserve, rescued the US economy from falling into the abyss. But, political gridlock has stalled any further help just as parts of the economy have begun to falter.
While congress dithers, the Fed and a whole host of economists have joined the chorus of those suggesting more stimulus payments. If, nothing happens during this term of congress, will there be help in the next? And, how will your investments and the US economy do in the meantime?
Intrinsic Value of Your Investments
We return again and again to the use of the intrinsic value calculation as a guide to rational and successful investing. Consumer spending is at the base of the intrinsic value pyramid. When there is money to spend it helps build the investment pyramid and when there is no money to spend the pyramid crumbles. Our expectation is that the next administration and congress will embrace a robust infrastructure program in the USA. This will drive the US economy and your investments. What happens before next year is anyone’s guess as a lame duck president and senate may or may not do anything to help the economy and your portfolio.
In the meantime, be careful with over-priced stocks at a time when the market could take another hit before heading back up.
Sentiment Analysis of the Stock Market
The broad set of appetites, fears, and beliefs of those investing in and trading the stock market are referred to as market sentiment. This crowd psychology or tone of the market drives prices up and down. At its extreme, it is manifested by fear in falling markets and greed in rising ones. Successful sentiment analysis of the stock market provides extra and early insight for successful stock investing and trading. Common indicators of market sentiment include the put to call ratio, the VIX “fear” index, the breadth of stock prices, the degree to which the market is seeking safe haven assets, the high/low market index, and the CNN Fear and Greed Index.
Sentiment Analysis in Financial Markets
Standard analysis of financial markets always includes important moving averages and other ways to make sense of market data. But, sentiment analysis is financial markets can give you insights before the standard market data shows you anything. An interesting finding some years ago was that Google searches for a company name have a high degree of correlation with price changes of that company’s stock the following week! Sentiment analysis in the stock market has to do with getting into the minds of investors before they start driving prices up or down.
Stock Market Sentiment Indicators
Stock market sentiment indicators that precede stock price movement include information from the options market. The VIX index is based on volatility of S&P 500 options prices over a month. When the VIX goes up, it indicates market uncertainty (and fear) and when it goes down, it indicates a relaxed and secure market. Another simple and useful indicator is when the market swings to safe haven assets. When this happens, the VIX also tends to be high. Other indicators like the CNN Fear and Greed Index generally reflect the same swings in market sentiment.
Trading Market Sentiment
Technical stock traders follow technicals when planning and executing their trades. The rationale is that the market takes into consideration all available data and reacts accordingly. And, by reading the data, one can predict near-term changes in the market. Market sentiment information can be added to the mix to give the trader a heads-up as to where to watch for profitable trades. Because market sentiment indicators precede market changes, successful traders use the info to direct their research but rarely to guide specific trades.
US Stock Market Sentiment
Because the stock market always looks forward, US stock market sentiment does not always match the state of the economy or recent events that should be driving stock market prices. We have seen this in 2020 when the Covid-19 pandemic crashed the stock market and then tech stocks came roaring back. Although much of this was based on continued or improved earnings, it was also based on positive market sentiment. Investors are looking past the pandemic to a positive future. This is why the market has seemed to be ignoring the economy.
Measuring Market Sentiment
Without accurate ways to measure the sentiment of the market, market sentiment assessment is a lot like stock tips. They may be useful but you need to do your own homework before acting on them. In the case of market sentiment, this involves using the standard market sentiment indicators like the VIX or flight to safe haven assets. Because these measures of market sentiment do not have a one to one correlation with subsequent stock prices, investors need to follow up with standard measurements of market data and technical indicators.
Weak Market Sentiment
When investors do not see much hope for market gains you see weak market sentiment. It is not negative sentiment in which investors expect to see the market fall but rather the sense that there will be little or no market growth for the foreseeable future. At times of weak market sentiment, you can expect to see short term investors and traders move into cash or cash equivalents. On the other hand, dedicated long term investors will assess long term intrinsic stock value and adjust their portfolios accordingly.
What Is Sentiment Analysis in Marketing?
Sentiment analysis is not limited to the stock market. It is commonly used in marketing. The point is to look past what customers say about a brand and understand what they want. While traditional data includes clicks and shares, sentiment analysis in marketing looks at the quality of customer to brand interactions. This information is of the sort that experienced salespeople come to understand over the years but can be arrived at by analyzing internet data instead of accumulating insights over many years.
Invest in Space X?
The United States is again launching astronauts from US soil to the International Space Station. Since the Space Shuttle program was retired, the USA had to pay Russia to launch US astronauts from the Baikonur Cosmodrome in Kazakhstan. The credit goes to Space X and eventually to Boeing as Space X has passed all of NASA’s tests, including a test flight with two astronauts to the Space Station. Boeing is fixing a glitch that has put them back a step or two. You can easily invest in Boeing, but can you invest in Space X? The quick answer is that you cannot invest directly in this private company but it is still possible to do so indirectly.
Space X and Rocket Boosters That Can Be Used Again and Again
One of the keys to success in exploration of space, keeping the Space Station going, returning to the moon, or going to Mars is reducing the cost of launching a rocket. According to CNBC sixty percent of the cost of a big rocket is the booster. With the exception of the space shuttle, rocket boosters were always allowed to fall back to earth after a launch. But, Space X changed that by launching rockets, turning off the booster before all of the fuel was used, and then re-igniting the booster to fly back to earth and land! This has become standard for Space X launches and makes their system hugely more efficient that those used by anyone else.
Goals of Space X
This private company was founded in 2002 with the stated purpose of reducing the costs of space exploration and eventually going to Mars. It has succeeded in reusing boosters and has a contract to bring astronauts to the Space Station. Mars is still in sight but a ways off.
Can You Invest in Space X?
According to WFMJ, the original money for Space X came from the private equity group, Founder’s Fund. A later investment came from the DFJ investment group. The third round of funding came from Fidelity and Google. Since Fidelity is private the only way to invest in a company that has equity in Space X is to invest in Alphabet, Google’s parent company.
It is unlikely that Elon Musk, who is the driving force for Space X as well as Tesla will ever want the company to go public despite the huge windfall that would mean for the original investors. That is because Musk still wants Space X to accomplish its ultimate goal of going to Mars. Diluting the control of the original investors, including Musk, would endanger the fulfillment of that dream.
Alphabet has a market cap of just over $1 trillion dollars. Alphabet’s share of Space X would be worth a couple of billion or more if the company went public. Thus, if you were to invest in Alphabet to get a piece of Space X, your Space X investment would only be 0.2% of your Alphabet investment. Nevertheless, Alphabet is a pretty good investment for the long term.
Is Fractional Investing Good?
There are two common reasons for fractional investing. One is that you have a limited amount of money to invest and the individual shares of stocks that you want are too expensive. The other, related, issue is that you want to diversify and don’t want to wait a year or two to purchase one share each of several stocks. In a world where individual stock prices have gone higher and higher, one option is to buy fractional shares. But, is fractional investing good or just a compromise? Today you can just as easily buy and sell fractional shares as individual shares and the benefits are the same (fractionally) as if you own individual shares. In fact, if you are in a dividend reinvestment plan, you have already been receiving fractional shares with your reinvestments.
What Is Fractional Share Investing?
Investopedia tells us that a fractional share is anything less than a full share of stock. Traditionally, fractional shares come from stock splits, dividend reinvestment plans, and other actions by a corporation. Until recently, fractional share investing was not available to investors. However, today a brokerage firm can “repackage” stock investments in order to provide a market for fractional shares. The advantages include better diversification and the risks include higher fees per individual purchase.
instead of the Whole Pie
Is Fractional Ownership a Good Investment?
This brings us to the question, is fractional ownership a good investment? First of all, fractional ownership is not limited to buying stocks. It is a common approach to real estate investing. As with fractional investing for stocks, fractional investing for real estate lets you get into expensive investments with the capital that you have instead of being left out. Fractional ownership of vacation property lets you and your family enjoy locations that would otherwise be too expensive. And, when prices rise over the years, your investment can also appreciate.
Investing in Fractional Shares
If investing in fractional shares sounds like a good idea for you, where do you go, and how do you proceed? Although you have probably heard of Robinhood because they advertise a lot, there are more options. Here are a few, courtesy of Clark.
Acorns allows you to start for $1 a month, has no trading fees, and no minimums.
Bumped has no fees, no minimum investment, and, occasionally, free fractional shares.
Fidelity has no minimums or account fees, lets you in for as little as $1 a trade, and gives you access to more than seven thousand ETFs and stocks.
Robinhood has no commissions, fees, or minimum investment and lets you invest from your smartphone.
Schwab charges on commissions when you buy stocks and lets you buy fractional shares for as little as five dollars.
Stash allows you to buy shares of ETFs for as little as five dollars a month without commissions.
Stockpile offers access to more than a thousand ETFs and stocks for ninety-nine cents a trade without minimums, monthly fees, or a sign-up fee.
Is Fractional Gold a Good Investment?
When gold started the 1970s at $32 an ounce, there was no need for fractional gold investments. But, today, at about $2,000 an ounce, it has become popular. But, is fractional gold a good investment? The first answer is that gold may or may not be a good investment, depending on your timing. The other has to do with how you want to invest in gold. Gold ETFs track the price of gold without your having to store the shiny stuff. Fractional shares of a gold ETF let you into the gold market at a reasonable cost.
Fractional Trust Deed Investing
A trust deed is used in many states in place of a mortgage on property. For expensive properties, money may come from several sources. Any one individual has a fractional share of the trust deed. Fractional trust deed investing is secured by the property and can be a profitable way to invest. However, real estate investing has its own pitfalls and opportunities. Those who know the ropes generally do well and those who naively think that profits come easily often live to regret their investment decisions. The same applies to fractional trust deed investing.
Fractional Ownership Investment
Any fractional ownership investment gives you a partial share of an asset. This can include income sharing, priority access, usage rights, and lower rates. In the case of vacation properties, the benefits are similar to those enjoyed by timeshare owners. This sort of arrangement gets you into luxury cars, aircraft, and vacation homes for less than if you purchased the entire property. The drawback is that whoever is setting up the fractional ownership investment will typically take their profit off of the top. Thus, your return on investment will commonly be less than if you made the deal entirely on your
Stockpile Fractional Investing
For those who would like to get into stock investing but have very little capital, Stockpile fractional investing is one of the ways to go. These folks let you start out with investments of as little as $5 and give you access to more than 1,000 ETFs and stocks. Because there are no minimums or monthly fees, this is an easy way to dip your toe into the stock market. Their handy app lets you make investments directly from the internet and even make gifts of stocks to others.
The one question that folks interested in fractional share investing need to ask themselves is why not just diversify by purchasing shares in an ETF that tracks the S&P 500.
Is a High P/E Ratio Dangerous?
The P/E ratio is a time-honored way to value stocks but in today’s market P/E ratios are sky high. Is a high P/E ratio dangerous? The P/E ratio compares company earnings to its share price. Both forward and trailing P/E ratios are commonly used to assess stock valuation. Over the years, a stock that has a P/E ratio higher than other’s in its market sector is either expected to grow or is simply overpriced. The problem today is that so many stocks have high P/E ratios, which casts doubt on the value of this metric.
Why Are P/E Ratios So High?
Over the years the average P/E ratio for stocks in the S&P 500 has been between 13 and 15. When earnings go up the P/E ratio goes down. Investors buy and the P/E ratio comes back up. But, why are P/E ratios so high today? Tesla has a P/E ratio of more than 1,000. Amazon has a P/E ratio of 120. Netflix has a P/E ratio of 83. Apple has a P/E ratio of 17. Why are P/E ratios so high for Netflix and Tesla? The reason is that enough investors believe that Tesla will become the dominant company in the electric car industry and that Netflix will dominate the streaming content niche. In addition, with interest rates at historic lows, even over-priced stocks can look attractive.
Disadvantages of Using P/E for Valuation
During a bear market the P/E ratio of a stock may be misleading. When we consider the intrinsic value of a stock, we look to the future and not the immediate present when the business cycle has slowed down. And, a steadily growing stock that is coming to dominate its market niche will typically have a high P/E ratio as investors want to get in before the price goes even higher. But, if a company is really failing and its stock price is falling, the P/E ratio may mislead investors into thinking that the stock is stable.
P/E and PEG Ratio
When you are factoring growth into the equation for a stock, the PEG ratio can offer more insight than the P/E ratio. The PEG ratio is the price and earnings to growth ratio,
PEG = (P/E ratio/Annual Growth Rate)
In the best of all possible worlds, the PEG of a fairly priced stock should be one. Market Watch writes about the “three stock markets” and warns that FAANG stocks with high P/E ratios are overpriced, stocks traded by the Robinhood investors are crazy, and the rest of the market has value if you can find it. Their observation is that the P/E ratio makes sense in the broader market while the FAANGs are priced too high and the choices of most Robinhood investors make little or no sense.
If you are interested in a stock like Tesla, a better approach than the P/E ratio is to compare their progress to that of companies like General Motors, Ford, and Volkswagen. The winners in the race to dominate the electric car market will necessarily be the ones that are flashy today but the ones who are most efficient and profitable in the long run.
Are Covid-19 Vaccines Good Investments?
The new coronavirus has swept across the world, killing nearly a million people and making more than 30 million sick. The effect on the global economy has been devastating even though the US stock market is ignoring the economy. As investors look for profitable investments in this era of Covid-19, vaccine makers come to mind. There are a hundred potential vaccines under development and several in trials in the final stage before getting approved. The question for investors is this: are Covid-19 vaccines a good investment?
How Profitable Are Vaccines?
Although the vaccines under development for preventing Covid-19 may save the world from the current pandemic, vaccines are not the best money-makers for pharmaceutical manufacturers. Boost Oregon provides a bit of insight with an article asking Aren’t Vaccines Just Moneymakers for Pharmaceutical Companies? The short answer is, no. They are not.
The total global sale of vaccines by all companies for all diseases is $24 billion a year. By comparison, the total sales of homeopathic remedies and supplements are $36 billion a year and the total sales of a single drug such as one for hepatitis C drug are $10 billion a year. Total sales of all medicines run to about $750 billion a year. All vaccines come to about 2% of big pharma sales and the Covid-10 vaccines will be only a part of all vaccine production.
How Long Will Covid-19 Vaccines Be Moneymakers?
Despite optimistic projections by the current administration, it will take two or three years to vaccinate enough people across the globe to reduce Covid-19 to a memory. Thereafter, the virus will either go away or become another yearly vaccine. In the first case, all profit from Covid-19 vaccines will be within the next two or three years. In the other case, Covid-19 vaccinations will become a yearly occurrence and part of the yearly vaccine production which is about two to three percent of big pharma sales.
Are Covid-19 Vaccines Good Investments?
For huge companies like Johnson & Johnson, Covid-19 sales will be a tiny part of their profit. For companies like Moderna, the profit will be more significant. But, as The Motley Fool notes, Moderna is absurdly overvalued and dangerous ahead of a market crash.
There is no doubt that Moderna’s technology and progress in its vaccine race are to be commended. The issue arises when one takes a closer look at the market opportunity for COVID-19 vaccines. Right now, there are about 15 experimental vaccines in phase 2 clinical trials, nine experimental vaccines in phase 3 clinical trials, and five vaccines with early approval despite lacking efficacy data. Moderna’s competitors, Pfizer and AstraZeneca, already have a combined manufacturing capacity to produce three billion doses of their coronavirus vaccine candidates next year. The world only needs about 15.6 billion doses of two-dose vaccines for global immunity, and that’s not taking into account affordability or delivery logistics.
The next problem comes from the monetization model of vaccines themselves. After vaccination, it is unlikely a patient will need another shot for an extended period of time, cutting off the possibility of mRNA-1273 to generate recurring annual revenue.
The point is that even the front-runners in the vaccine race will share only a part of the global market in which as many as half of the world population will either refuse the vaccine or not be able to afford it. These vaccines are wonderful investments for the well-being of the human race but not so good for safe and profitable investments.
Does ESG Investing Work?
ESG investing is one of a class of sustainable investing practices. ESG stands for environmental, social, and governance. When you engage in this manner of investing you look for companies that are well-governed, follow positive social practices, and help (or at least do not hurt) the environment. While this way to invest is a positive social force, does ESG investing work to increase your investment assets? Or is it a way to give to charitable causes while being disguised as a way to invest? Will you make money investing this way or would you do better simply giving your money to a cause that you support?
ESG Investment Considerations
Why is anyone interested in ESG investing? Many investors and millennials especially want to use their assets to do good in the world besides making money. Thus they consider both the financial impact of their investments and the social and environmental aspects as well. The first consideration for most ESG investors is if the company causes harm to the environment or our social fabric. The next issue is honest and reliable governance. If a company does not make the grade, it is avoided. The next step is to look for companies that have a positive impact. Such investments include clean energy companies, those that work to provide necessary services at affordable rates, and those that lead in reducing toxic emissions by creating new products and processes.
Incorporating ESG Into Investment Strategies
There is no rule saying that you need to dump all of your investments and find some gold standard ESG investments in the moment. The best route for incorporating ESG into investment strategies is to look at your current investments. One by one, look at their effects on society and the environment. Are they well-governed? Any ones that obviously do not fit in your ESG strategy can be sold and the money parked as cash or short term bonds. Then, start looking for suitable ESG investments. You do not need to make a one-to-one transition but rather pick the best ESG options a little at a time as you learn the process.
Investing in ESG Funds
A useful way to get into ESG investing is to let experts pick your investments. Investing in ESG funds with companies like Fidelity and Vanguard lets you put your money to work in the right areas without having to become an immediate expert in ESG companies. Many investors are happy staying in ESG funds. Others will do more research, typically looking at the companies in the funds, and start picking ESG stocks on their own. If you have a specific interest in a cause such as green energy, this can become your next stop after starting out with ESG funds.
What Is the Difference Between ESG and Impact Investing?
Investors who want to make a difference and not just avoid “bad” investments will commonly move from ESG investing to impact investing. Here is where you will use your investments to fund new research, processes, and technique that will clean up the environment, avoid pollution, or make necessary services available to the poor of the world. Clean water, affordable health care, clean energy and more fall into this approach. The difference between ESG and impact investing is in looking for a specific result instead of simply avoiding “bad” investments.
Advantages of ESG Investing
The advantages of ESG investing are two. Your money has a positive impact on the world. And, you typically have profitable investments. So, how does ESG investing work to make money as well as to do good? The answer lies in the governance part of ESG. Well-run companies are typically profitable companies. The “performance penalty” for socially responsible investments is small. What you need to look out for are companies that have a great story but are not well-governed. These can border on being scams. Here is where you need to do your research and pay attention as you go.
The Rise of ESG Investing
Socially responsible investing dates back at least fifty years and has gained momentum as issues like climate change and social injustice have come to the fore. Back when you had to pick and choose your investments one at a time, ESG investing could be difficult but today there are reputable ESG funds and lots of useful advice available. As the millennial generation comes of age, we can expect to see the rise of ESG investing continue as money is put to good and profitable use by smart and concerned investors.
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Fixed Income Investments
What are the best fixed income investments in an era of low interest rates? It depends if you want income or security. We offer a few thoughts about how you could invest the fixed-income part of your investment portfolio. Because your approach to fixed income investments in this era of low or even negative interest rates will depend on your philosophy, we look at this issue from two directions.
Fixed Income Investments for Maximum Income
If you need income from your fixed income investments in 2020, you need to accept greater risk in return. On the extreme end, junk bonds will offer a much higher interest rate than AA or AAA bonds, but you run the risk of losing your capital. Market Watch reported in June 2020 that junk bonds sold in record numbers as companies became desperate for cash. The spread between treasuries and junk bonds has been running at about 5% while the risk of losing your investment with a jun bond runs as high as 60%. In order to protect yourself against loss in this market you need to buy lots of high yield bonds across many companies in order to get the average risk of loss and the average return. Then you can expect to get a higher return and not lose everything. If you want to take this route, the best choice might be to look at a fixed income ETF that focuses on high yield bonds. You can find a list of high yield bond ETFs at ETFdb.com.
Fixed Income Investments for Maximum Security
The most secure fixed income investments are US Treasuries. These securities always offer lower interest rates than less-secure investments but are backed by the full faith and credit of the U.S. government. The best interest rate you can currently get for a 30 year bond is just under 1.5% and for a six month bond, 0.13%. The rationale for accepting such low rates is that you can protect your capital against losses in the stock and real estate markets and even gain more purchasing power over time if interest rates go negative.
Today’s effective yield on AAA bonds is 1.58% according to YCharts. This is a better yield than US Treasuries and reasonably safe as the only AAA US corporate bonds are those issued by Johnson & Johnson and Microsoft. Considering that tech stocks are currently in a downward slide, such bonds might well be a better choice than stocks until the Covid-19 crisis subsides and business gets back to usual. If the USA follows the EU, UK, and Japan into negative yield territory, bonds purchased at 1.5% will be more valuable than their initial prices as well as being safe havens in times of economic peril. How you choose to go with fixed income investments will depend on your need for income as well as your need to protect your capital in a time when the social and economic future is doubtful. As with most investment choices, diversification may be your best protection.
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