As many current and former university students (myself included) will tell you, you don’t have to be smart to succeed in university, you just have to be smarter that the other students in your class. This is called surfing the curve, because regardless of how bad you may be in an absolute sense, as long as you’re good in a relative sense, you should be OK; if you’re above average, you’re pretty much guaranteed to pass and continue on to the next course. Curve surfers benefit from other students’ lack of attention, attendance, and interest in class; it’s not that they’re particularly bright, it’s just that they’re less dumb than the others. A cynical philosophy, it’s true, but not at all uncommon.
I was reminded this weekend that the same principle applies to politeness, and the result can put money in your pocket.
As discussed a few days ago, dividend stocks look to be in for a rough ride over the next several months, maybe even years. With bonds looking to offer more attractive rates, bond investors will be pulling their money out of stocks, as will many traders. The result, I believe, will be a prolonged price slump for dividend-paying stocks, which, until recently, had come through the past few years in pretty good shape. Of course, keeping your eye on the ball, a slump in stock prices for dividend payers is a good thing: lower prices means higher yields, duh. Where it gets a bit more complicated is here: How — if at all — should dividend investors modify their investment approach to take advantage of the price run-ups that most of us have experienced over the past few years? Is it time to become what you used to make fun of? Should you become a market timer?
It’s no secret that there is a lot of concern amongst dividend investors these days; it seems that everybody and his dog in the financial press is asking (and then answering) the question: Is it time to get out of dividend-paying stocks? (Some people are even messing with their readers, including Robb, over at Boomer & Echo.)
Generally, their answers are: No, you shouldn’t dump your dividend stocks. Why? Because:
interest rates may yet stay where they are for some time, so don’t leave the party early; market timing is a mug’s game
a properly diversified portfolio is already prepared to take advantage of a rise in interest rates if and when it comes
stock picking and sector rotation are not games that most individuals can win on a consistent basis; it is far better to pick your strategy and stick with it.
That’s all well and good, but that doesn’t answer the question that I’ve heard posed around the water cooler a few times recently: If rising interest rates are ultimately a sign of a healthy economy, why are people worried about dividend stocks falling? Here’s why: