Diary of an amateur investor

fistophobia said:
I have seen this a lot - people wanting or needing to be fully invested. Remember, cash is an asset class.
I ask you this as your conscience - can you handle a 20 - 30% market correction? What would you do?
Hold tight, re-invest back in at lower levels?
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In the event of 20-30% correction, would hold tight, and hopefully reinvest depending on cash position at time. Currently at 5% but will be allowing the income to build up before reinvesting.
 
Hi @spanners
Your posts have started me thinking about my own approach to investing.
Just an observation - you are highly concentrated on high dividend stocks. Now, I won't get into the usual debate (about dividend bad, capital growth good), but one thing to consider is that dividend stocks sometimes behave like bonds .e.g if a stock is paying a 5% dividend yield when interest rates go up, that stock price will fall accordingly. Worth a bit of research.
 
looks like you have done a good job, i have a few of those investments myself. Just wondering about british american tobacco, I was going to invest in this myself but the cloud hovering over tobacco stocks and government regulations stopped me. I know this has been the case for many years but is the day of reckoning finally here?
 
RedOnion said:
Hi @spanners
Your posts have started me thinking about my own approach to investing.
Just an observation - you are highly concentrated on high dividend stocks. Now, I won't get into the usual debate (about dividend bad, capital growth good), but one thing to consider is that dividend stocks sometimes behave like bonds .e.g if a stock is paying a 5% dividend yield when interest rates go up, that stock price will fall accordingly. Worth a bit of research.
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I get the feeling companies paying out a good dividend puts pressure on companies to work on growth that bit harder just my feeling re dividend bad no dividend could mean less pressure and focus for growth within Companys year in year out,
 
@RedOnion - yes concentrated on dividend stocks and deliberately so; some of the most important parameters when I was looking at individual shares were dividend cover and growth. I understand the debate and I get that if a company pays out a 10p dividend its share price will drop by 10p, and I am not overly worried about that. My personal preference for dividend shares is (tax aside):

a) I prefer to bank a return, little and often.
b) In some businesses a dividend is slightly like a pulse. Good growth and cover is a sign of health and difficult to fake. Obviously if they are borrowing to maintain a dividend then that is a warning sign.
c) Psychologically I think I will be more able to hold my nerve and sit tight in the event of a correction, if the portfolio is earning something, i.e 3.5 - 4% yield.
d) If I intend to take a long term view of the investments - then long term dividend growth is more appealing to me than capital growth. If in thirty years time I hold a bunch of shares that are yielding an income of 20% on a cost basis, and that 30 previous years income has paid for the initial investment I will be happy with that outcome irrespective of what capital growth I have foregone.
e) Whilst I know there is a debate in another thread that aiming to just spend the income from a retirement portfolio is stupid, some of the wealthiest people I know are from families who have preserved riches for generations from living by the simple rule - never spend capital! They live by the motto - build a fire to warm your family, not to roast yourself.

Dividends are not for everyone, but it's a strategy that I am comfortable with.
 
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@joe sod can't comment individually on BAT as per site rules but re tobacco stocks in general my view was there is a bit of life left in them. Customers are addicted to the products and the companies are making some progress with new products eg vaping etc. And it would not surprise me if they are lining themselves up for the legalisation of marijuana!
 
@spanners
Sorry, I made my point badly. I understand your reasoning about dividends. My point was more that some of these stocks begin to behave like fixed rate bonds, in that there's an inverse relationship between price and risk free interest rates. Particularly mature stocks where there is no real growth opportunities, like utilities or telecoms.
I'll see if I can dig out an article to read.
 
@RedOnion apologies, rereading it I see you made your point about interest rates perfectly well, I think I just assumed it was a what's the big deal about dividends question! Maybe I am overly sensitive!

I've read a bit on your point which is why I binned some of the big names from the original holdings, and very nearly binned Vodafone for the same reason. But I agree there is a significant risk/probability that the "bond proxies" will drop in price if/when interest rates rise.

I am hopeful that there is some growth available in mining, oil, pharma and consumer staples. The big dividends of the ones I have added are financials and house building. I think I worry more about being overweight to UK domestic construction than the effect of interest rates.

Rising interest rates shaped my thinking more in that I've tried to avoid companies that have very significant debt burdens.

The logic being that (as long as dividend is maintained/increased) I am comfortable enough with rising interest rates causing the share price drop because investors seek lower risk yield elsewhere. I'd be far more concerned about a share price drop caused by the company struggling with its debt burden as interest rates rise.

Hope that makes sense?
 
One of the articles I read on this subject that shaped my views was by Terry Smith, fund manager of Fundsmith, writing in the FT in 2015. In summary he said:

"If you are a long-term investor you should own the high-quality bond proxies and close your ears to the siren song of those who say a rate rise will cause you problems. If you are not a long-term investor, I wonder what you are doing in the stock market at all and so will you one day." - http://archive.is/tjkX4

Interestingly, after I had read his 2015 thoughts, I came across a more recent opinion, March 2018; in summary he said:

"I don't think you should ever invest for income. It is a mistake." - http://citywire.co.uk/money/terry-smith-dont-invest-for-income-my-fund-is-better/a1097563

In fairness he is addressing two different points, but it is just one example of many times in recent reading about investment that I have been left scratching my head!

After thinking about it for a while, I interpreted his 2018 views as a further endorsement of the bond proxies and pulled the trigger!
 
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