I
can hear investor hand wringing from here.
They are a nervous wreck over how the Federal Reserve Bank’s actions may
affect interest rates and subsequently stock prices
Every
day the market moves in relation to what it thinks “The Fed.” Is going to
do. The Fed., of course, is the Federal
Reserve Bank. Janet Yellen, its
president, will be speaking this week about how the Federal Reserve Bank will
manage its assets and the effect that will have on interest rates. Very smart and very rich investors are very
nervous that the higher interest rates will negatively affect stock prices.
Even
Alfred Ferol called me to discuss how we should position his portfolio. Should you sell your winners? Should you sell everything? Is there anything you should buy?
Here
is my take. Market timing is a fool’s
errand. For every report you read about
stock prices going down in an environment of increasing interest rates, you can
find a report that shows just the opposite.
This dichotomy of opinion is not new to investors. What you need to do first is decide if you
are really an income investor.
If
you are an income investor, you only care about your interest, dividend, and
covered call income.
Interest
Income
Interest
comes from those bonds you bought at a discount to par. The price of these bonds will go down if
interest rates go up. But the par value
of the bonds stays the same and provided that you hold to maturity and the
underlying company is solid, you interest income is probably safe.
Hopefully,
even if your bond maturities are laddered, your max duration is between 5 and 7
years. If interest rates truly are in a
period of consistent increases, you will be able to get more income from the
next bond you buy in 5 or 7 years.
Dividend
Machines
Some
of your dividend stock prices may suffer.
Particularly those stocks that are dependent on European business. During periods where US interest rates go
up, the US dollar increases against the Euro making these multinational stocks
go down. A weak Euro means revenues,
when measured by the US dollar, are less than when the Euro is strong. But, a well selected multinational stock
like Kimberly Clark, or Coca Cola, or Johnson and Johnson will still pay your
dividend. Moreover, it is highly likely
they will continue to increase your dividend.
Many
of these multinational companies were on quite a road up as far as stock price
goes making their dividend yields look anemic (less than 3%.) I usually try to sell calls on these stocks
to get more yield and if my stock is taken away, I move the cash into a higher yielding
stock. But some stocks like JNJ do not
have very good calls. So when the price
goes down, I either ignore it or I add to my position.
Covered
Calls
Covered
calls are the most variable of the three income streams I use. You cannot count on selling calls on every
stock every ninety days or so. You have
to work your portfolio constantly. One
of the good things about uncertainly is it leads to volatility. Volatility is a covered call seller’s
friend. You only need one call buyer
that thinks a stock is undervalued and has potential to go up to fill your cash
coffers with covered call premiums.
In
summary, be not a market timer. I stick
with my three primary sources of income, interest from discount bonds,
dividends from Dividend Machines, and covered calls on Dividend stocks and then
I go out to dinner.
Good
Income Investing.
TheMoneyMadam