An Investing Danger Bigger Than Inflation - InvestingChannel

An Investing Danger Bigger Than Inflation

Proprietary Data Insights

Top Mega and Large Cap Financial Services Searches This Month

#3Bank of America50,632
#5JPMorgan Chase32,663
#6Berkshire Hathaway25,175
#7The Blackstone Group13,734
#8Wells Fargo13,548
#10Morgan Stanley11,215

An Ugly Chart, Potentially Dangerous Investment 

Source: Google Finance 

Like so many you can pull up these days, that’s one ugly chart. A sampling of the financial services stocks investors searched for most over the last month, according to our proprietary Trackstar database. 

However, there’s something uglier – and potentially dangerous – lurking amid the data. The Juice elaborates in a minute, but first something equally as ugly and dangerous. 

You Call This Cooling Off? 

That’s the latest on rent prices across the nation. 

Nationally, the median list price for apartments crossed $2,000 for the first time ever in June. At 14%, that’s the smallest year-over-year increase in 8 months. 

But still. That’s some ugly data. 

Why Is It Dangerous?

Pretty simple. 

If you adhere to the budget principle that you should spend no more than 30% of your gross income on rent, you need to earn $6,666.66 a month to afford the typical apartment. That’s just shy of $80,000 a year. 

Here’s the problem: In Q1 of this year, wage and salary employees in the US made $1,037 per week, which equates to $4,148 a month (just south of $50,000 annually). 

Using these numbers and the 30% rule, the median American worker can afford to pay up to $1,244 for rent. 

That’s a problem. A dangerous one. 

The Juice will have more to say about this later in the week, using specific cities as examples.

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An Investing Danger Bigger Than Inflation

Key Takeaways:

  • It’s one thing to get “paid to wait” as an investor. 
  • It’s entirely another to watch your original investment dwindle away. 
  • Several factors can help you strike a balance between growth and income. 

Investors often seek income-generating assets, such as dividend stocks, to help offset inflation. The Juice writes a fair bit about dividends, however we also warn you about the potential downsides, such as yield traps.   

Consider the following headline from a popular mainstream financial media outlet: 

Translation: As the earlier chart illustrates, Morgan Stanley (MS) hasn’t performed well. But at least they’re buying back shares and paying a dividend while the stock price languishes. 

Just another way of saying you’re “getting paid to wait.” Because each quarter you collect a dividend payment – income – you can keep as cash or reinvest in new shares of the stock. 

It’s Not About Morgan Stanley

The Juice is not here to tell you whether or not you should own Morgan Stanley. At least not today. We’re just saying proceed with caution on the “get paid to wait” mantra now attached to the hip of dividend growth investing

This strategy can work well. It can ease the brunt of a stagnant or falling stock price. The Juice recently covered a “get paid to wait” strategy using covered calls. So, we get it. 

This said, let’s run some back of the envelope math on getting paid to wait with Morgan Stanley. 

It’s Ugly, If Not Dangerous

One year ago, you could have purchased 100 shares of MS for $92.63 each. This would have cost you $9,263. 

With MS trading at $74.69 the other day, you’d be sitting on $7,469. Down roughly 19%. An on-paper loss of $1,794. Not good stuff for the even slightly faint of heart. 

Between the time you bought the stock and now, you would have collected four quarterly dividend payments of $0.70 apiece. That’s $2.80 over the last year, or $280. 

This little injection of cash reduces your on-paper loss to $1,514, and your negative return to just over 16%. 

Not bad, assuming it works for you and you have confidence in Morgan Stanley’s share price rebounding to where you bought it and beyond.

If It Doesn’t Work For You

More than a few investors, including those close to needing their money, have fallen for the get paid to wait line, only to see their original investment tank. 

We’re not going to get into what if you reinvested the dividend on the potentially positive side or the IRS tax on dividends on the negative side. We’re keeping it clean and saying, you might not have time or the stomach to wait.  

Getting paid to wait only works when share price pressure is temporary. 

The Bottom Line: As with many facets of life, people come up with cute little slogans. We rarely know exactly where they originate from. However, they get thrown around minus disclaimers about the downside of following this or that nicely-marketed strategy. 

If all a company has going for it is its dividend, what’s the point of investing in that company in the first place? You’d be better off in a stock that’s up 20% and pays no dividend than you would be in a dividend payer that has tanked and might continue to tank.

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