Why Is the Dollar Falling?

The dollar is a safe haven currency for people all over the world. When times are difficult, investment tends to flow into the USA and strengthen the dollar. Now that vaccines are expected to help stop the pandemic global optimism is on the rise and this strengthens investment options other than the USA.
In addition, the US Federal Reserve has promised to go “all in” on keeping interest rates low, buying bonds, and printing money to keep credit flowing and the economy from going into free fall. The prospect of interest rates being low for the long term weakens the dollar. And, the Biden administration will most-likely push for more financial support across the board and for low interest rates into the long term future. Investors looking for high returns will end up looking to Europe or Asia for investment opportunities.

Will the Weakening of the Dollar Continue?

A hallmark of the Trump administration has been the trade war with China and high tariffs. This has tended to strengthen the dollar. Because Biden is more likely to rely on other means of dealing with China, consumers will be paying less for imported products, global growth will be positive and the dollar will continue to fall.

As we have frequently noted, a weak dollar is not a bad thing for American industry and tends to support exports. Thus the dollar will fall until it hits a level where it helps American industry and then it will stabilize. Meanwhile the price of oil will be cheaper in foreign currencies as will other commodities that are routinely denominated in dollars.

Because not all nations prefer a surge in their currency versus the dollar we can expect central banks to take action, which will modify the picture.

Because the pandemic is the root cause for effects on the global economy and currencies, we can expect all of this to continue for months as the disease worsens in the winter months, vaccines take months to be administered in sufficient quantity and people are convinced to abide by common sense precautions to drive down the incidence of Covid-19.

How Should You Invest with a Weakening Dollar?

The US economy is going to worsen before getting better. The longer Congress waits before passing more broad-based stimulus measures the worse it will be. To avoid having your investments hurt by a weakening dollar look offshore. You can purchase ETFs that track offshore stocks or bonds. You can increase your investments in US multinationals that have huge offshore footprints. And, you can move savings into foreign currencies or purchase commodities that will benefit from a falling dollar. For most folks, US multinationals or ETFs in the USA that track foreign stocks are easier to invest in and get out of and don’t require you to learn Forex or commodity trading!

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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.

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What Is Driving the Stock Market Rally?

Ever-higher earnings are a large part of why some of the big tech stocks keep going up. But, in an interview with CNBC, Dallas Mavericks owner and billionaire Mark Cuban says it has to do with interest rates. You’ll know when the rally is over when rates start going up.

Mark Cuban, who made billions of dollars during the dot-com boom, said Wednesday that the stock market is not reminiscent of 1999.

“Interest rates were a lot different back then,” Cuban said on CNBC’s “Fast Money Halftime Report.” “And you saw a lot more people participating in the market. … You don’t see that now. That individual day trading really led the market to be frothy.”

The levels of day trading have receded and given way to the rise of index funds, creating a fundamentally different landscape, Cuban said.

“There’s so much money chasing index funds, so as long as those funds keep on growing the market is going to go up,” said Cuban, who sold Broadcast.com to Yahoo in April 1999 for $5.7 billion.

His argument is that there is a lot of money looking for investments and, so long as rates are low, the stock market and its derivatives art still where the best return lies.

How Abruptly Will the Market Change Direction if Rates Go Up?

Investopedia discusses the effect of interest rates on investments in an article about what can cause a significant move in the stock market.

Rising interest rates can place downward pressure on real estate investment trusts (REITs) and slow the housing market. Higher interest rates mean higher borrowing costs slowing down purchasing activity and causing stock prices to dive.

These factors will come into play a bit at a time as rates go up and earnings drop off. However, the stock market anticipates events as wells as reacting to them. Many investors, like Cuban, will make adjustments as soon as rates start to rise in anticipation of the bull market ending. We have often noted that Warren Buffet’s silent warning to investors is that (like before the dot com crash) is stockpiling cash!

What Else Could Stop the Rally?

The threats of war, societal chaos, and economic collapse can all drive the market down temporarily. For example, the Chinese coronavirus may be an opportunity for some pharmaceutical stocks, but a global pandemic like the Spanish Flu epidemic a hundred years ago that killed 500 million worldwide would have widespread effects on the economy, investments, and governments!

Investment Risks for 2019

• The trade war will continue and get worse.
• Interest rates will rise excessively due to the Federal Reserve.
• The global and U.S. economy will slow down.
• As a result the stock market will continue to be volatile and experience losses.

Investment Risks for 2019 from the Trade War

The deficit that the USA runs with China and the world in general is not supportable. As such something needs to be done to staunch the monetary bleeding from the US treasury and pocketbooks. Likewise, the steady loss of US intellectual property and technical secrets cannot go on without the USA losing its dominant position in the world power structure.

Thus the USA should not give in easily in order to resolve trade negotiations with China. A few months ago we looked at what happens to your investments if the trade war becomes permanent. As we noted in that article, China wants to move to a more dominant and secure position on the world stage. They have bitter memories of having been forced “inward” during the period of European colonial expansion. And, the Chinese Communist Party intends to stay in power, for which they will need to maintain economic growth and social stability.

The key to this situation is that neither side wants to give way. As such the trade war may be protracted and economically damaging. This is one of the distinct investment risks for 2019 and beyond. A slower global economy with effects on both China and the USA could damage investment prospects across the board.

Investment Risks for 2019 from a Too-aggressive Federal Reserve

When the markets tanked in 2008 and 2009 the USA and the world were on the brink of another Great Depression. Two of the measures that saved the day were instituted by the U.S. Federal Reserve. First of all they dropped interest rates to almost nothing. Second, they instituted quantitative easing in which the Fed purchased U.S. Treasuries and corporate bonds with their own funds. This was equivalent to printing money and served to inject funds back into the financial system to replace part of the $7 Trillion or so in value that was lost in the real estate and stock market crashes.

Back when we wrote the article there was concern about the Fed tapering off their quantitative easing campaign too quickly. They are, in fact, steadily reducing the size of their bond and treasury portfolio by letting the bonds expire. And, the Fed has been slowly but steadily bringing interest rates back up to more normal levels as justified by economic growth. The concern for 2019 is that the Fed will be too aggressive and with an extra rate increase or two cause a recession.

We recently looked at how higher interest rates will affect your investments. The affect will be three fold. First, the value of your bonds and treasuries will go down as rates go up. Second, you will gain a higher interest rate on bonds and treasuries in the future. Third, the steadily increasing cost of servicing the huge American debt will choke off investment, infrastructure improvements, and the US economy.

Investment Risks for 2019 from an Economic Slowdown

The driver of the stock market for the last decade has been continually impressive earnings. But, how can earnings continue to go up when people start saving their money instead of spending it. We just saw how the market reacted to Apple announcing that iPhone sales are slipping in China. Intrinsic stock value is dependent on forward-looking earnings. Whether it is Apple selling iPhones or the Chinese industrial complex churning out products for the world, the production of products needs to match the size of the market. And the ability of the market to pay for these products need to keep up. Otherwise, prices or production need to fall. This is why markets tend to have boom and bust cycles. Other factors like the trade war and interest rates aside, investment risks for 2019 include an aging bull market and economic boom in need of a reset.

Risks Associated with a Volatile and Falling Stock Market

There will be two risks this coming year associated with both volatility and a falling market. One is that if you don’t get out of investments soon enough you will lose a lot of money. The other is that if you get out of good long term value investments as the market falls and do not get back in, you will miss out on long term profits as the market recovers!

Preparing Your Investments for the Storm in 2019

If you are a true long term value investor who looks only at the big picture, you may simply choose to ignore what you consider to be the static of a volatile and falling market in 2019. You will continue to use fundamental analysis in picking and tracking your investments. The only investments that you will sell will be those that do not promise profits over the long term and not necessarily those with weak prospects in the short term. Market jitters, interest rate concern, and the normal ebb and flow of markets are generally not a concern for a true long term investor. But, long term mega-trends are real and should be considered. This where the trade war is not just a short term issue. Rather it is a symptom of a global power struggle that will last a long, long time. To the extent that the USA and China, or the USA and Russia, can come to amicable terms, compete without working to wreck long term damage on the other, the current trade war and other such issues will be temporary. To the extent, that the major powers see this as an existential struggle for survival, it will redraw the economic, political, and military map of the world and that will not be good long term investing or prosperity.

Investment Risks for 2019 PPT

Immediate Effects of Higher Interest Rates on Your Investments

• U.S. Treasuries
• Corporate Bonds
• Dividend Stocks

U.S. Treasuries and Corporate Bonds

If you currently have U.S Treasuries, AA, or AAA corporate bonds in your investment portfolio, they just became a little less valuable when the Fed raised rates last week. And, if the Federal Reserve follows through with its projections and raises rates twice next year, these investment vehicles will become progressively less valuable. However, if you simply hold your bonds or Treasuries to maturity, you will not lose money on these investments. And, if you wait for higher rates, you will be able to purchase these bonds and treasuries and earn higher interest rates. Ideally, you will buy these when rates peak. Then you will be earning a good interest rate and your bonds or treasuries will become more valuable as rates start to fall.

Dividend Stocks

Dividend stocks like utilities are often considered to be proxies for bonds. So, when rates go up but dividends do not, dividend stocks lose value. Providing that the basic business of the dividend stock does not change, such as with a utility, these investments will perform like bonds and Treasuries. But, if higher rates usher in a recession, many now-strong dividend stocks may take an earnings hit as well. Over the long haul the value of these investments will depend on their intrinsic stock value, in which case the effects of higher interest rates on the general economy will be important.

Longer Term Effects of Higher Interest Rates on Your Investments

CBS News writes that the U.S.’s interest payments are about to skyrocket. This is a big deal because it affects all sectors of the economy, government, and personal finances.

A recent Moody’s analysis noted that persistent high debt, among other factors, would lead to “persistent deterioration in the U.S.’s fiscal strength over the next 10 years.”

High federal borrowing could also crowd out other types of investment. The federal government borrows money by issuing treasuries; the investors who buy them are effectively lending to the government. A very high supply of treasuries could effectively starve other parts of the economy of investors’ money, some analysts say.

“If you issue more and more treasuries, the dollars you use to buy them need to come from somewhere. They could have gone into the stock market, or into other investments,” according to Torsten Slok, chief international economist at Deutsche Bank.

In the article they show a graph from the Office of Management and Budget showing the expected huge increase in payments on U.S. debt.

As the number of US dollar available for investment dwindles the US will not be the first country affected. Emerging markets are already suffering and there is the prospect of massive business failures in China this coming year. Despite Trump’s America First rhetoric, this is an interconnected world and trouble offshore will come back to bite the USA in the proverbial backside as well.

The US debt is already huge and due to the Trump tax cuts it is going to be a lot bigger. What is really worrying, however, is the size of the debt compared to the US gross domestic product, GDP. The game plan with recent tax cuts was that the resulting economic stimulus was going to raise GDP above 4%. That has not happened despite lower unemployment rates and, until now, a surging stock market. Many point to higher interest rates and their fallout as a reason that the stock market is getting bearish.

More Rate Hikes on the Horizon

Bloomberg writes that we are not going to see the death of rate hikes just yet.

Money markets appear to have completely nixed the idea of Federal Reserve interest-rate hikes in 2019, although the outlook may not be so simple.

As the Fed jacked up rates by a quarter of a percent in their most recent meeting, predictions of no more rate hikes seem to have been more wishful thinking than not.

The Fed is famous for thinking long term and is almost continually at odds with the short term political concerns of congress and the U.S. president. Too-low interest rates have an effecting of distorting markets. Real estate prices escalate because folks can buy more for their dollar due to the lower cost of servicing their debt. Investors tend to bid up stock prices and overheat the stock market. As Investopedia notes, the effect of interest rate changes can take up to a year to be felt.

Interest rates affect the economy by influencing stock and bond interest rates, consumer and business spending, inflation, and recessions. However, it is important to understand that there is generally a 12-month lag in the economy, meaning that it will take at least 12 months for the effects of any increase or decrease in interest rates to be felt. By adjusting the federal funds rate, the Fed helps keep the economy in balance over the long term.

However, the stock market continually seeks to predict the course of the economy and the value of investments. And the stock market has been very volatile and in correction mode. How higher interest rates will affect your investments will be largely negative over the short term as rates go up and the costs of borrowing rise. Over the longer term the risk is tied to the drag on the US economy and US investor caused by an ever-increasing US debt burden as more and more of the results of US productivity are eating up by servicing the debt.

Is there a place to hide as this scenario plays itself out? If you like cash positions when the market is volatile, a smart move is to build a “ladder” of short term AA or AAA bonds or US Treasuries. A bank account is also protected by Federal Deposit Insurance. Then the issue is predicting a market bottom, providing that there is one as the long term effects of mounting US debt play out.

How Will Higher Interest Rates Affect Your Investments? PPT

While stocks like J.P. Morgan, Goldman Sachs and Visa do well when rates are surging, Walmart and Coca-Cola struggle.

Walmart averages a loss of 0.8 percent when rates rise 25 basis points or more in one month, the worst performance of any Dow member in those instances since 2008. Coca-Cola, meanwhile, drops an average of 0.4 percent.

Johnson & Johnson, Procter & Gamble and Verizon also average losses when rates rise sharply.

A recurring theme is that stocks which pay dividends act like bonds and decrease in value as interest rates go up!

Is Gold Ready for a Comeback?

The famous Warren Buffett quote is basically that you should invest in stocks that people are fearful of and avoid stocks that everyone loves. This approach often works because the market tends to overshoot to the high side in bull markets and to the low side in bear markets. In this regard Market Watch takes a look at FANG stocks versus BANG stocks.

There’s ongoing fallout from a Bloomberg report that said China planted teeny tiny spy chips in U.S. computers doesn’t look to be over. Big tech names like Apple AAPL, -0.86% came under pressure, weighing on the Nasdaq COMP, -0.58%.

The pain for investors could spread further. Apple is a top holding in the SPDR S&P 500 ETF SPY, -0.20%-a big proxy for the S&P 500-and such passive-investing vehicles have become extremely popular in this long bull market.

That brings us to our call of the day from The Felder Report’s Jesse Felder, who suggests going against the crowd with some cheap, anti-passive precious metals miners.

The so-called “BANG” stocks in mentioned in the article are gold mining stocks.

• Barrick Gold, ABX
• Agnico Eagle, AEM
• Newmont Mining, NEM
• Goldcorp, GG

These gold mining stocks are at their lowest prices in many years. And, in our article about gold and silver as liquid investments, we noted that when the price of gold starts to rise, gold mining stocks go up faster that gold bullion and when gold starts to fall, mining stocks go down farther and faster.

In the article they also make the point that so many investors have gone over to passive investing via ETFs. Because the FANG stocks are so heavily represented in index funds, they have benefited from this change in how investors invest. And, because these lonely mining stocks are in nobody’s passive investment portfolio, they are more greatly under-priced than one might expect from the price and recent performance of gold bullion. If the stock market gets hurt by higher interest rates, not to mention the trade war between the USA and everyone else, gold may make a comeback and these BANG stocks could do very well on the upswing in gold prices.

Meanwhile take a look at the dividend stocks in your portfolio and decide which of these will suffer as interest rates go up.

Which of Your Investments Will Suffer as Interest Rates Go Up? PPT

Inflation has begun picking up, and it looks as if the Federal Reserve is going to let it keep climbing.

The Labor Department on Tuesday said that consumer prices rose by 0.3% in September from August, putting them 1.5% above their year-earlier level. With gasoline prices stabilizing, annual inflation ought to push above 2% on the year within a couple of months.

Core prices, which exclude food and energy costs, have been there for a while. Last month they were up 2.2% on the year.

The worry on the mind of Wall Street for the last couple of years has been that in order to stay ahead of inflation the U.S. Federal Reserve will start raising interest rates and high interest rates would hurt stocks. It appears that the Fed might not be as worried about inflation as we all thought. Assuming that the Fed does not raise rates very fast and inflation goes up, what does increasing inflation mean for stocks?

How Inflation Affects Stocks

The effect of inflation on stocks is that profits and prices eventually decline. Investopedia discusses inflation’s impact on stock returns.

Rising inflation has an insidious effect: input prices are higher, consumers can purchase fewer goods, revenues and profits decline, and the economy slows for a time until a steady state is reached.

This negative impact of rising inflation keeps the Fed diligent and focused on detecting early warning signs to anticipate any unexpected rise in inflation. But once the unanticipated inflation works its way through the levels of economy, the impact of a higher steady state of inflation can have varying effects. In other words, the unexpected rise of inflation is generally considered the most painful, as it takes companies several quarters to be able to pass along higher input costs to consumers. Likewise, consumers feel the unexpected “pinch” when goods and services cost more. However, businesses and consumers eventually become “acclimated” to the new pricing environment, and then even when a new higher steady state is reached, the expected inflation that may occur thereafter can result in consumers spending more cash. These consumers become less likely to hold cash because its value over time decreases with inflation. For investors, this can cause confusion, since inflation appears to impact the economy and stock prices, but not at the same rate.

Those who gained adulthood in the 1970’s remember going Target to buy garden supplies in the fall because the same supplies were going to be much more expensive in the spring. Inflation is disruptive on several levels. The end result at the end of the 1970’s was called stagflation in which the economy stagnated along with stock prices while the cost of living kept going up. When inflation is a dominant factor companies quit hiring to save on salaries which retards growth. This was the stagflation effect that the Fed is usually concerned about. The problem today is that the Fed is so worried about choking off the recovery that they are probably going to wait a bit longer. This generally heartened the market as the immediate effect of higher rates is a drop in stock prices.

What Does Increasing Inflation Mean for Stocks? PPT

The CBOE Volatility Index (VIX), or fear gauge, soared ahead 39.9% on in Friday trading, making it the 11th greatest move in the index in more than 25 years.

Wall Street simply got spooked by worries that the end of the easy-money era is over. But let’s get real-a 25 basis point or even 50 basis point increase in the fed funds rate is hardly going to torch the bond markets and, in fact, would show the Fed’s greater confidence in the U.S. economy’s ability to both weather higher rates and continue to expand.

Despite a 2.1% decline in the Dow and a 2.5% drop for the S&P 500, both indices are less than 3% below the all-time highs set in mid-August.

Their opinion is that the current worry about a small increase in interest rates is much ado about too little. To understand how a small rate increase might signal the end of the easy money era let’s start with the VIX.

The VIX Fear Index

According to Investopedia VIX is the ticker symbol for the CBOE volatility index.

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”

VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.

A VIX of 39.9% is certainly in the fear and uncertainty range. Should it be? Is the market at such risk? Normally that might not be the case but when stocks are generally overpriced it could be time for a correction.

Are Safe Stocks Really Safe?

The Wall Street Journal reports fear for the safest investments as the market stutters.

Investors who spent the summer floating serenely on mirror-calm markets have been frantically bailing out the boat in the past two days. Whether the storm that hit U.S. stocks on Friday and spread globally on Monday is the start of something much worse or merely a squall depends a lot on what explains it: the Federal Reserve, global central banks or the unwinding of excessive complacency. Unfortunately for shareholders, the signs point to the latter.

In a normally priced market and with more normal interest rates it would not be a huge deal to see an increase of a quarter percent or so in the Federal Funds rate. The problem is that rates have been historically so for 8 years and the market has come to assume they will remain so. Overpriced stocks, especially dividend stocks that will get hurt with higher rates may be in for a big correction. This pending end of the easy money era is seen in the abrupt rise of the VIX fear index.

End of the Easy Money Era PPT

The dollar headed for its worst month in 5 1/2 years after Federal Reserve Chair Janet Yellen doused speculation the U.S. central bank will pick up the pace of interest-rate increases. The yen strengthened.

A gauge of the greenback approached the lowest since June after Yellen said the Fed will act “cautiously” as it looks to raise rates against the backdrop of a deteriorating global economy. The dollar has fallen against all of its 31 major peers in March with Russia’s ruble and Brazil’s real posting the biggest gains, helping emerging-market currencies to their best month in 18 years.

The Fed sees itself as walking a narrow line with inflation on one side and recession on the other. Although the US economy is moving along the global picture is bleak, especially in emerging markets and China. Thus the Fed will proceed slowly in raising rates and the dollar will weaken a bit. Will a weaker dollar hurt stocks or help them?

Stocks Higher on News of Cautious Approach to Higher Rates

The stock market’s first response to Yellen’s speech was to go up. Reuters reports that Wall Street is higher on the news of a cautious approach to higher rates.

Wall Street was higher on Wednesday as investors took comfort from Federal Reserve Chair Janet Yellen’s comments that the central bank should tread cautiously on raising rates this year.

Global markets cheered Yellen’s remarks, which suggested that a rate hike was not immediately on the horizon. The dollar fell more than a percent, while bond prices rallied.

“Yellen’s comments allowed investors to breathe a sigh of relief that the Fed will not be raising rates in April,” said Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence in New York.

Why are investors so pleased that rates are not going up in a hurry?

Interest Rates and Markets

Investopedia writes about how interest rates affect U.S. markets.

Changes in interest rates can have both positive and negative effects on the U.S. markets. When the Federal Reserve Board (the Fed) changes the rate at which banks borrow money, this has a ripple effect across the entire economy.

higher interest rates mean that consumers don’t have as much disposable income and must cut back on spending. When higher interest rates are coupled with increased lending standards, banks make fewer loans. This affects not only consumers, but also businesses and farmers, who cut back on spending for new equipment, thus slowing productivity or reducing the number of employees. The tighter lending standards mean that consumers will cut back on spending, and this will affect many businesses’ bottom lines. This will cause the businesses to reduce the number of employees that they have and to hold off on any major equipment purchases.

The bottom line is if interest rates go up too far and too fast they hurt the economy and by extension the stock market. It turns out that a weaker dollar will not hurt stocks at least in the short run. However, if the Fed waits too long and inflation takes hold that might be another story.

Will a Weaker Dollar Hurt Stocks? PPT

When stocks go sideways, dividends matter.

For instance, the $1.3 billion ProShares S&P 500 Dividend Aristocrats ETF (NOBL) , which owns large, consistent dividend payers, is up 3.4% so far since the calendar flipped to January. If NOBL’s performance were to keep up at that pace, investors are looking at a 17.8% rate of return in 2016.

And that’s not an uncommon occurrence, either. According to research from Morgan Stanley, dividends have contributed more than 41% of the stock market’s total returns over the last eight decades.

But, as the article points out, to get the biggest benefit you need to learn how to pick dividend stocks. You need to consider not just the current dividend yield but also what that yield is likely to be in the years to come. And while nothing guarantees a dividend payment next quarter a solid balance sheet, a history of paying dividends and a history of steadily increasing dividends over the years are important. And there is the matter of dividend yield versus interest rates.

Dividend Stocks as an Alternative to Bonds

In our article last year about What to Look for in a Dividend Stock we looked at dividends and interest rates.

Dividend stocks are an alternative to buying bonds. Power companies typically pay dividends that are competitive with bonds but are stable companies with little growth. Their share prices rise and fall inversely to interest rates. That is because the company has a fairly stable dividend that does not go up when interest rates go up. So, the stock price falls as rates rise. The New York Times reports on how rising long term interest rates are depressing the market.

An increase in long-term interest rates rattled investors on Tuesday, nudging major United States stock indexes lower for the second day in a row.
Traders around the world have been selling off government bonds in recent weeks. That trend accelerated on Tuesday, bringing down bond prices and, in turn, driving up the benchmark United States bond yield to its highest level since late November.

The point is that when rates go up stocks, and especially dividend stocks go down. Ideally what to look for in a dividend stock is a company that will thrive when rates go up, such as a bank. Or, simply wait until rates go up and purchase the dividend stock when it is cheap. How to pick dividend stocks for the long haul is to buy when interest rates are high and the stock is cheap. The dividend will likely remain the same as interest rates fall and the stock price will appreciate.

Another short term concern for buyers is when dividends are paid. The price of the stock should reflect whether or not you will receive the dividend of if the seller will pocket the dividend along with your payment for the stock.

How to Pick Dividend Stock PPT