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J#21: Busting the Myth that “High Yield = High Risk”

Fair is Foul, High Yields and Low Risks

“Fair is foul, and foul is fair” is the famous oxymoron in William Shakespeare’s Macbeth.  In his play, the three witches inform us that reality contradicts itself and that all is not what it seems when Macbeth plots and murders King Duncan to take the Scottish throne for himself.

It is a dichotomy where whatever appears appealing (i.e. ‘fair’) is impure and whatever appears impure (i.e. ‘foul’) is actually appealing.

High yields are often thought to be associated with high risk (i.e. a higher chance of default).  This is a core tenet of the fixed income (bond) market. But it is certainly not the case with the three recommendations I have written about – Twiga CementJupiter Mines and Navigator Global Investments.  These three companies yield a rich double-digit dividend, have strong balance sheets (zero debt) and are solid businesses with a history of positive cash flow.  They are safe investments and offer great returns.

The high yields are the product of outstanding business fundamentals, and not the product of some investment bank’s financial engineering tricks, the way that many so-called high-dividend income stocks all too often are.

The corollary to the belief that low yields mean lower risk is also false.  Take for example UK government bond prices in the graph below.  Yields have fallen but government debt levels as a percentage of GDP have exploded, more than doubling over the last 10 years.  Although credit risk has been elevated by more debt, yields have fallen.

UK debt and bond yields
Source: economicshelp.org

This goes to show that high yields are not necessarily “foul” and low yields, not necessarily “fair”.  This dichotomy is Double Digit Dividend’s unique selling point – the ability to invest and generate HIGH YIELDS in companies that are safe investments.

The witches in Shakespeare’s Macbeth then say, “Hover through the fog and filthy air.”  This too can be applied to Double Digit Dividends in that we are all about dividends.  Let me explain.

Warren Buffett advises everyday investors that their best strategy is to buy an S&P500 Index fund.  His advice can be read here:  https://www.businessinsider.com/personal-finance/warren-buffett-recommends-index-funds-for-most-investors

The chart below shows total returns over the last 30 years:

    • gold (yellow line) 
    • silver (silver line) 
    • the Dow Jones Index (blue line)
    • the S&P500 Index (red line)
    • the Wilshire Large-Cap Index (black line)

The Wilshire Large-Cap Index is where all cash pay-outs, including dividends, are automatically reinvested back into the fund itself.

I have zoomed in on the last 10 years of the 30-year chart in the second picture below.  The message from it is clear – an investor that invests in a portfolio such as the Wilshire Large-Cap Index that reinvests in dividends, trounces the S&P500 Index that Buffett recommends. 

Specifically, the Wilshire Large-Cap Index, with its dividends reinvested, returned 20 times the initial investment (2,000%) over a 30-year period compared to the S&P Index return (without dividends) of 10 times (1,000% percent).  DOUBLE the return, thanks to dividends.  Applying Shakespeare’s caution to today’s reality? It is by “hover(ing) through the fog and filthy air” of data that you can maximise your returns through dividends.

Source: longtermtrends.net
Source: longtermtrends.net (zoomed in on the 30-year chart)

Dividends (and reinvesting them) are key in outperforming the market (an index fund).  Importantly, for a large majority of my readers, dividends can also offer a source of INCOME in what is a near-zero interest rate world.

The Double Digit Dividends Fund we shall be incorporating will be a TRUE income fund.  100% of ALL dividends will be distributed (most likely on a quarterly basis).  Investors will also have the option of reinvesting their dividends in the fund to build greater compounded rates of return like the Wilshire Index.

As an aside, it is interesting to pull out a 50-year chart of the performance of gold, silver and the S&P500 Index.  This 50-year chart is reproduced below.  The Wilshire Large-Cap Index (with dividends reinvested) is not included as it only dates back to 1978.  The message from this chart is clear too – gold trounces equity (and silver) over the long haul.  Besides being a “chaos hedge” in times of uncertainty, there is a good case to buy and hold a portion of gold in your portfolio. But that’s a story for another journal.

50-year chart of Stocks vs Gold & Silver
Source: longtermtrends.net

Wishing you good investing.

Peter

 

A Message for My Children

Your Dad only read and studied William Shakespeare’s Macbeth at school.  Shakespeare has many other great works and each, no doubt, has important lessons on building investment skills and life skills.

The school syllabus for you, and many other students, tends to gravitate towards the STEM (Science, Technology, Engineering and Maths) subjects.  Your father too took a similar path with Computer Science and Accounting.

Paradoxically, many of the better (if not the best) analysts and investors I have come across have political science, history and literature majors (subjects with very little to do with hard numbers and finance).  This reveals the breadth of subjects I hope you will learn with excitement and application.  It also goes to show that you should not let yourself be dragged by Plato’s wild horses and what is:

“Fair is Foul, and foul is fair:
Hover through the fog and filthy air.”