An Income Investor's Guide To 2018
By Genia Turanova | January 25, 2018 |

Contrary to what some pundits might tell you, this bull market is indeed aging. The longer it goes on, the more likely cyclical forces will take their toll. What goes up, must go down, after all. 

However, income investors have their own special goals and needs. Some of you aren't too concerned with the market's gyrations -- because you might not be overly concerned about the preservation of principal. 


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This makes a lot of sense. Let's say, for the sake of simplicity, that your portfolio consists of one stock worth $10,000 and yielding 5%. Your annual dividend will, therefore, be $500 and your portfolio will be yielding 5%. Easy, right? 

Now, if your imaginary stock declined 25% but kept its payout, your portfolio's value would decline to $7,500, but your annual dividend would stay the same $500. (Of course, the nominal yield would jump to 6.7%). Regardless of the size of the principal, your annual income will be intact. 

But here's the catch: This only works if your stock does not reduce its dividend. If the reasons for your imaginary stock's decline had something to do with its profitability, it could theoretically cut its payout to preserve cash. And if the stock in this example reduces its dividend by half, you might want to consider jumping ship... but now that the value of your portfolio is lower, it would buy you far less dividend yield in another company than before the 25% price drop. 

This could happen to the best stocks in the best markets. Blue-chips are less likely to become a disappointment in the dividend department, but even they aren't immune. 

Exhibit one: General Electric (NYSE: GE). One of the bluest chips around (and a founding member of the Dow Industrials to boot), this conglomerate never quite recovered from the Great Recession. After struggling with declining sales, GE finally pulled the trigger on the dividend, cutting it in half this past fall. 

Of course, the economy was to blame for GE's first round of troubles, and there were business mistakes, wrong decisions and bad calls along the way, but that's exactly the point: There are many ways a good company can lose its way. There's also no single way -- other than watching closely -- to predict when and where this will happen. Staying vigilant and watching for the negative signs -- whether it's a single company or the market as a whole -- should bring dividends, too, albeit of a different kind. 

As happy as this market has been, income investors who have, on average, less time to recover the principal, should remain as vigilant as ever. 

A Short List Of 2018 Risk Factors
A negative trigger could come from many places. 

A string of profit warnings, as unlikely as it might sound today, is a possible catalyst. While the overall market isn't really expensive, the emphasis should be on the word "really." This market has been driven up by the growth in profits, both realized and expected. And if profits fail to match lofty expectations (for whatever reason), the market, which is still not expensive based on those expectations, will suddenly appear overpriced. 

Bonds could bring trouble, too. The other day, investors panicked when it was reported that China's government officials recommended slowing or even halting the country's purchases of U.S. Treasuries. (The country is the United States' largest creditor.) Longer-term Treasuries sold off to levels not seen since 2014. 

The economy could overheat, and the Fed might over-tighten interest rates. The yield curve, which I just discussed in my most recent issue of The Daily Paycheck, is a picture of how different rates in the economy behave. And if this picture starts showing an inverted curve -- with shorter-term rates higher than longer-term ones -- the market might not like it, inasmuch as an inverted yield curve has often been a precursor to a recession. 

Then there's oil. After falling to a multiyear low around $26 per barrel two years ago, oil prices have since staged a strong comeback, rallying to more than $64 per barrel in mid-January (a nearly 150% increase in less than two years). 

Low oil has acted as a stimulus for the economy, but now, after more than doubling in the past two years, this prop is gone. While the higher price of oil is a strong positive for companies, it might at the same time become a negative factor for others. 

My best advice: Stay invested, but alert, and watch the market closely. This way, you will be able to take appropriate actions if the market declines, and will remain positioned to benefit if the strong January market does indeed mean another good year for investors.

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This article originally appeared on StreetAuthority.

 

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