Resorting to official information and diversifying are keys to getting investment right.
Personal Insight
Invest in what you understand. Only put your money in those assets whose rules of the game you know. In its advice to investors, every Stock Market Supervisor reminds them that retailers have a wide range of products within their reach but that “not all of them will be appropriate for their investment profile.” they always recommend understanding the product characteristics, such as expected return, risk, time horizon, and liquidity.
Investor profile. The Markets in Financial Instruments Directive, better known by its acronym MiFID, guarantees the protection of retail investors. The new regulation aims to provide them with the necessary information to understand the risks of the investment products and services they want to contract.
Patience. The success of investments in the different risk assets requires more or less long maturity periods. Patience is a fundamental weapon for investors, who must be careful as they could face occasional losses that test their nerves.
Market Research
Official information. Companies issuing shares and bonds are obliged to report to supervisory bodies. In Spain, all investors have equal access to all relevant information on companies, such as income statements and all pertinent information that may affect the evolution of the business or the profitability of the investment, such as the dividend policy.
Diversification. The broader and more diverse a portfolio is, the greater the chances of success. Combining different products with different maturities and risk levels reduces volatility and downside risk. Diversification is also geographic. Each world economy is in a different phase, so in equities and fixed income, it is possible to bet on stocks and bonds from very consolidated countries from others in a recovery phase or emerging economies.
Past performance. The success of a financial product in the last year or the previous five financial years does not guarantee future performance.
“The economic environment is subject to multiple influences that can alter the trend of the markets or certain companies listed on them and, consequently, the returns obtained.”
Advice. The different investment products and the operation of the financial markets are increasingly complex and require a lot of attention, so each saver must evaluate whether it is advisable to seek professional advice for better portfolio management.
Risk Aversion and Dividends
Lower interest rates increase the attractiveness of dividend portfolios. Companies’ dividend payouts to shareholders continue to grow. The number of companies that pay out their profits generously and allow investors to buy shares with a cushion continues to grow. The trend is good news considering that it is attractive to generate income from a dividend portfolio due to the expected fall in interest rates in the coming months.
In its latest dividend survey, Janus Henderson upgraded its 2024 global payout forecast to $1.74 trillion, an increase of 6.4% over 2023. The firm explains that “companies have been resilient, and most sectors continue to invest for future growth. This favorable backdrop has been particularly positive for the banking sector, which enjoys solid margins and limited credit deterioration, boosting earnings and generating plenty of liquidity for dividends.”
In addition, he notes that “the commencement of dividend payments by U.S. media and technology giants Meta and Alphabet, along with China’s Alibaba, among others, is a positive sign that will drive global dividend growth.”
In this favorable scenario, investors looking for reliable recurring income continue to count on the stability of companies in mature income-generating sectors, such as utilities or concessionaires, that are not over-leveraged, either operationally or balance sheet-wise, with an above-average payout (percentage of profit going to the dividend) and that generate sufficient operating cash flow to pay that dividend and with little dependence on the economic cycle.
Not only do Dividends matter
It is not just the dividend amount that is important to pay attention to. There are two other critical factors in the decision. The first is that the payment to shareholders must be sustainable over time. Therefore, try to avoid negative surprises.
The second factor, equally or more important, is the upward trend of share prices. In worldwide markets, a large group of companies with dividend yields of more than 6% plus potential share price appreciation of between 10% and 35%.