Anyone who has followed Quill’s postings over the years knows Quill thinks that investing in dividend-paying stocks (which includes div-paying ETFs) is A Worthwhile Thing. But if you review the lists of divvie stocks he advocates for, and compare their present prices to what he likely paid to buy them, you can see that he’s probably losing more on market price than he’s gaining from the divs. And I’ll freely confess to suffering the same fate from most of the preferreds I’m carrying and from some of the divvie ETFs.
So, this question asks itself: How fat does the div have to be before it can offset what one might lose in market price? Alternatively, How resistant to downturns in market price does the divvie vehicle have to be before the div is worth chasing? (Note, here, I’m not talking about ‘dividend capture’, which is a separate game, in which one buys just ahead of the record date, collects the div, and then closes the position, and, yeah, it’s a bit more complicated than that. But that’s the gist of it.)
And so that things are “real” --and not just “theoretical”-- let’s dig into some options-based ETFs I own a lot of --at least for me, anyway-- namely, USOI, OILK, SLVO, and GLDI. I’ll leave it to you to pull charts for them and their div history. Instead, let’s focus on some larger issues.
Depending on whom you want to believe and how evidenced their arguments are, the US is going to muddle its way out of its current economic and financial troubles, or maybe not for a very time (@ Jim Rickards). In either case, one’s gotta have a plan that’s more than just HDAH (Hunker Down And Hope). So my thinking was this. If the economy crashes, precious metals (PMs) will catch a bid, as will derivatives based on them. If it doesn’t crash, the price of the derivatives will decline, but the calls they write will pay well. I’m pretty sure Rickards is right, and I’d like to hedge my portfolio. So I had to ask myself, “What might be the best way for me to do that?”
Due to being massively called the last 5 years or so, my nearly all-bonds portfolio has been cut in half, leaving me with a lotta cash. But due to the Fed’s easy money policies, the bond market now offered few opportunities to redeploy. Stocks are over-priced, and they have been for years. Everyone knows that. So that wasn’t a place to park (a lotta) money, either. OTOH, given my age, the fact of having no debts, and a Current Ratio of 3x, sitting in cash wasn’t a damaging choice. In short, my days of needing to accumulate wealth were far behind me, and I really was in a position that I could HDAH without negatively impacting my modest, beer-and-bait lifestyle (not with house, car, and toys all paid for, and enough lumber and marine ply still on hand to build more boats than I’ll ever want to).
But markets are a beguiling mistress I’ve courted for decades, sometimes winning her favors, sometimes being scorned, and investing and trading have been part of my life since I was five or so and my parents helped me open a passbook savings account, and certainly, since age ten when I bought my first stock. So I took a lesson from my favorite mentor, Ben Graham, set aside 5% of AUM, and decided to see what I could do in an adverse market by running experiments, which led me to things like USOI and SLVO about which I still haven’t made up my mind.
Rickards argues the Fed will lose their fight against inflation, because they don’t understand it. But they are likely to crash the economy, which will quash demand and --as a secondary effect–dampen inflation. Meanwhile, ‘disinflation’ is likely to become ‘deflation’, which our dear government fears, because they can’t tax it. In a deflationary environment, cash is king, or at lest offers a positive return due to increasing purchasing-power. Rickards advocates carrying 30%, which creates both a hedge and optionality. He likes the 10yr note and would allocate a 10% holding. But I think he’s early on that call. He likes commodity plays, as do I, for another 10%. He’d put another 10% in to PMs. Etc. In other words, rather that run a typical, equities-heavy portfolio, which is essentially just the same, single bet made over and over again, he advocates for wide diversification across multiple asset classes.
I’ve never been a PM guy in terms of owning the physical, and I’ve got no urge to start now. But I am a value investor, and that game never changes. What’s ‘over-bought’ will get sold down to ‘fair value’. What’s ‘over-sold’ will correct back up to ‘fair value’. So I’m not willing to buy the stocks Quill advocates for at their still inflated prices and their tiny, 3%-5% yields. But something that offers 20% to 30% does interest me. It’s just a matter of figuring out how to manage their obvious risks, one of which is ‘market risk’.
Arindam
