Should Dividend Investors Become Market Timers?

Market timing for dividend investors?
Is it time to commit dividend investor sacrilege and try to time the market?

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?

What’s a dividend investor to do?

As mentioned in my last post, most of the advice out there is to hold on to the dividend-paying stocks you already own. Bearing in mind that the regular cashflow is the main focus for a dividend investor, this seems like good advice. But what if there is were a way to both keep the capital gains that you’ve probably made over the last few years and benefit from the price drop that is probably coming to dividend-paying stocks?

In a perfect world, a person could sell his divvy-payers before the proveriabal other shoe drops, and then re-buy them when they’re cheaper (the stocks, not the shoes). That is very obviously the the fool’s game called “timing the market”. There are people who believe that this is possible, but I’m not one of them…usually.

I’ve been letting my cash accumulate over the past several months, and it’s turned into a fair little pile (for me, anyway). The thing is, I think it’s pretty-much a given that dividend stocks will get hit pretty hard when interest rates go up, even if only for emotional and momentum reasons. I want to be ready when that happens. The price that I am paying is that I’m not collecting dividends on the shares that I could have bought with the money, had I invested it as I earned it. Yes, this is dollar-cost-averaging sacrilege, but there you go. I’m hoping to get lucky.

And now…the rest of the story

Everything above this line was written two days ago. I’ve got some time between classes, so I’m going to get this finished and published.

The last two days show a perfect example of what I’m talking about. If I had sold two days ago, when I wrote my last post, and then bought again today, I could have increased the number of shares I own without adding any new money.

Of course, if we had bacon, we could have bacon and eggs, if we had eggs.

And there’s the rub. Market timing after the fact doesn’t really take a genius. It doesn’t really make a lot of money, either, unfortunately for me.

The fact is, I didn’t sell two days ago, so I didn‘t increase the number of shares I own without increasing my investment.

Still, I’m sort-of playing the market-timing game. For a few different reasons, not all directly related to investing, I’ve got a bit of a hoard of cash in my accounts. At this point I’m waiting for prices to go down, and I’m even more sure now that they will, and when they do, that they’ll go down a long way. Bernanke’s comments that he wasn’t going to stop pumping money into the US economy yet (which was hardly news) resulted in a huge fall in stocks. Can you imagine what’s going to happen when he says that the end of stimulus spending is imminent, or  -shock, gasp! – that it’s actually happening? When that day comes, traders will be running for the exits, and there will be blood in the streets. The key at that time will be to remember that as a dividend investor, I’m playing a different game than the buy low, sell high crowd. I’m buying with the intention of probably never selling.

Was it right to sit on so much cash? I don’t know. All I know is that that decision has already been made, and I’ve already got the cash sitting there. If yesterday was any indication, it would be foolish to put new money in at this point. I’m going to wait and let this play out.

Anybody else on board, or am I out to lunch?

Leave a Reply

Your email address will not be published. Required fields are marked *