If you have been reading any financial newspaper or site for the past 6 months, you have seen numerous front pages concerning the catastrophic Government debt situation. It’s not only about the Greek debt anymore, now, we have tons of countries to be worried about:
Portugal
Ireland
Italy
Greece
Spain
And the most popular one: The United States of America has reached 100% of their GDP in debt.
So this is the end my friend, all governments are going to collapse and we will be down to trading gold for a piece of bread… really?
Why you should not care about US Gov Debt Problems
If I were a politician, or worse, a politician on Obama’s side; I would be darned worried about the US Gov debt problem! Why? Because it is the pre-game show topic of choice for the 2012 election. The Republicans and Democrats will fight until death over the debt to gain (or lose!) points in the polls.
But as an investor, I don’t really mind the Government debt problems. In fact, it is creating a huge opportunity for us, rational investors, while most people are panicking. I don’t care about Gov debt because they are not the ones supporting the companies I hold in my portfolio.
I haven’t heard about any Government financially supporting Coke or Johnson & Johnson. I haven’t heard about Intel concentrating its market development strategy based on selling their products to the US Government. They surely deal with them but there are tons of other clients! This is why most public companies are not sponsored by the guys with debt problems.
So while the market is heading down on fear that Greece will collapse or that other PIGS will follow them to the slaughter house, you can get healthy companies paying significantly high dividends.
The Good News About the Fear of Bonds
Since there is a fear climate over bonds and banks, most solid companies are keeping their cash flow for themselves. The financial theory explains that a company pays dividends when they can’t make more money through their operations. This is how we get to a stage where we have tons of well diversified and profitable companies racking up cash in their bank accounts like there is no tomorrow. This is also how we see the very same companies distributing a part of this cash in dividends to its shareholders.
Bonds, CDs and interest rates are at their lowest levels possible while you can earn 3 to 5% in dividends. Sure your portfolio value will fluctuate big time over the next few months. You will be under the impression that you are losing money for the small promise of 4% in dividend yield. However, if you invest in bonds, you can be 100% sure that once the interest rates go back up, you will be in the same situation… besides the fact that your stock will eventually go back on an uptrend while paying high dividends as compared to low interest paying bonds!
This is why it worth it to concentrate on buying dividend stocks at the moment: because shares are undervalued and the dividend rate is high. Isn’t this the best case scenario for an investor?
Recently, I bought 3 dividend stocks through a leverage loan. They have been rocking my portfolio through the fluctuations and I am technically not making any money at the moment. However, in a few months or next year, I’ll be showing a healthy portfolio with a positive value and a dividend payout over 4% ;-D
My only concerns toward Gov debts
I do have one concern about the current government debt situation: what is going to happen to banks??? There are 2 types of institutions able to finance countries:
Governments & Central Banks
Banks
This is why European banks are in the spotlight as they hold PIIGS bonds in their portfolio. If Greece would come to default, this could have a serious impact on banks’ financial results. However, since I only look at Canadian Banks for my portfolio, I still don’t mind too much 😉
Are you concerned about the Governments’ debts? About European banks having problems? Has it influenced your way of investing yet?
Looks like Greece defaulting is almost a given! What will be scary is if this has a ripple effect of the rest of high-debt countries.
I’d worry.
Especially about companies who live off consumables. The only real job growth in the US over the last decade is in the public sector. In order to deal with a debt crisis, money has to be saved. Since the US isn’t about to cut military spending by 40%, and tax increases are an endless battle with republicans, that means savings will be found in the employees.
Benefits, pensions, salaries will all have to be cut. Jobs will be lost. Without jobs, people cut spending drastically. Suddenly it’s not Head and Shoulders shampoo but the store brand. It’s not Coke, it’s generic Cola, or no pop at all.
Most corporate earnings these days are being buoyed by government stimulus in the US. There’s a massive cushion of government spending underlying the economy, and if that evaporates, every company will suffer.
Long term you’ll be fine. But in the short term? Government austerity will drag the whole market down.
I purchased some dividend stocks over the last couple of months too. We had some extra cash left over from a 4-plex down payment. I’m a bit afraid to borrow money (specifically margin) to buy though. If the market dip more, it’ll be hard to avoid margin call.
I agree that this may be time to start nibbling on dividend stocks. However the financial sector concerns me. Banks in Canada may not be that exposed to PIIGS bonds directly,however it is the CDS’s and other derivatives as well as investments in other financial institutions that could cause problems. Insurance companies are another area of concern, as some of them do hold PIIGS bonds directly. I think for now I will wait a little longer with regards to investing in the financial sector.
Count me in among those that are still staying out of the finance sector. I have only invested in insurance companies, but am staying away from banks. Just too risky, and not enough juice. The large U.S. banks like WFC are yielding around 2%. Even at 4% I’d still probably stay away.
Great post! I’m not worried and like you said this uncertainty provides good buying opportunities. I just picked up 3 (WAG, CNR, T) stocks a few weeks ago.
I do think dividend stocks are a brilliant strategy right now, but I worry about the impact on all stocks should government defaults begin happening. Dividends can only provide so much relief when the market drops 50%. Of course, that is the time to swoop in and purchase.