End Game for Central Banks

[jalanlong]

So how does everyone feel holding dividend stocks in a market that is pretty much dictated by low interest rates and constant Fed Stimulus?  Does anyone here hold any gold or long bonds or any hedges against inflation/deflation or is everyone more or less all in on dividend growth stocks?

For right now my savings is all in cash and dividend stocks but I am not sure how well that will hold up if a monetary crisis happens due to crazy debt levels etc.

[fenders53]

I own some gold, but I am not a fear mongering gold bug planning for the zombie apocalypse. 3 to 5% and maybe there will be times I can cash out along the way. Actually I own major mining stocks. They pay a div in all but the worst of a gold cycle. Gold is a small hedge in my port and if it turns into a profitable investment in the short term then great

[Otter]

The end game is a 2% inflation target and full employment, as that is what the Fed shoots for. Highly unlikely that either target is met in 2021, given current circumstances. Monetary policy will remain accommodative in the near-term, because deflation is a greater risk than inflation at the moment. The $1.9 Trillion stimulus being passed now is probably the last round of stimulus marketed as such. Defense bills and all of the other "must pass" legislation that gets passed annually, despite Congressional theatrics, will continue to be passed and not be labeled as "stimulus" by the press.

Personally, I am not a fan of gold as an investment or inflation hedge (I side with Buffett on that one). I prefer equities and real estate. They both tend to inflate alongside money, and are more liquid.

Treasuries are not currently a meaningful investment class for retail investors, in my opinion. If I was holding any, I would sell (top of a ~40year secular bull market in bonds seems like a decent time to unload). Since 2008, the buying of treasuries by the Fed from the Treasury has become the primary vehicle for carrying out economic and industrial policy in the face of a (mostly) gridlocked Congress over that period. In the absence of any legislative work that directs or influences economic activity (like infrastructure spending), the Fed is left to use modern monetary theory to carry out its mission of seeking full employment with a 2% inflation target. Buying treasuries to control the yield curve is the hammer that they have to achieve that objective, so everything looks like a nail. The Fed will continue to pursue its objective, even if it means negative real rates in the bond market. That said, I don't see them expanding QE further or explicitly making rates negative given where we are now, so the bond market is probably at its top.

If you want to know what happens next, my best guess is something like 2012-2016, when the recovery from the 2008 financial crisis got underway in earnest. The market will have short-term taper tantrums in response to any easing of QE or interest rate rises, but underlying economic growth from the recovery will keep equities moving up and to the right.

It could be years until the next bear market. Some unforeseen event (like COVID) could easily upset the applecart, but it doesn't look like there is anything on the horizon right now that spells trouble for the economy. This is the "green shoots" stage, as rapid vaccine rollout has us on a trajectory to normalizing by this Summer in the U.S.

[jalanlong]

i am skeptical of the ability of the Fed to raise rates given the interest on the national debt.

I am 52 and completely debt free. We are living on my wife's income so my income is totally free for savings. My current plan is to invest every paycheck into dividend growth stocks and hold them (hopefully) forever so that they throw off some decent income in my retirement and for my kids later in their lives.

[Otter]

(03-01-2021, 06:06 PM)jalanlong Wrote: i am skeptical of the ability of the Fed to raise rates given the interest on the national debt.  

I am 52 and completely debt free.  We are living on my wife's income so my income is totally free for savings.  My current plan is to invest every paycheck into dividend growth stocks and hold them (hopefully) forever so that they throw off some decent income in my retirement and for my kids later in their lives.

Currently that is true. The size of the debt places a cap on how high rates can rise without risking a total breakdown of our government/economy. 

The debt can be dealt with in several ways:

1. Reduction by paying it down;
2. Reduction by devaluation of the dollar;
3. A combo of 1. and 2.

My bet is on 3, with the majority of debt reduction coming from inflation. It’s how we’ve done it since the USD became a global reserve currency.

I’m curious how we continue the gravy train when the pricing of oil in dollars is no longer central to the functioning of the global economy. We already made one successful shift from Bretton Woods to the Petrodollar. The next shift should be equally profitable.

[crimsonghost747]

I believe the word "growth" in dividend growth investing is my main hedge against inflation.
My plan is to live off the dividend income, so as long as my portfolio's annual dividend growth rate is higher than inflation, then that should lead to a situation where I have more purchasing power each year compared to the last one.

[fenders53]

We aren't paying this debt down. We do not have the political will to come close to balanced budget. Inflation and growth are our current options. Better have some growth in our ports too.

[ken-do-nim]

(03-02-2021, 12:02 AM)crimsonghost747 Wrote: I believe the word "growth" in dividend growth investing is my main hedge against inflation.
My plan is to live off the dividend income, so as long as my portfolio's annual dividend growth rate is higher than inflation, then that should lead to a situation where I have more purchasing power each year compared to the last one.

The other option is to live off of the dividends after inflation is accounted for.  Let's say the inflation rate in a given year is 2.4%, and you are 100% invested in AT&T with its 7.4% dividend.  If you only draw 5% of those dividends and allow the rest to reinvest, you'll keep up with inflation.  If you say draw 4% and allow 3.4% to reinvest, you'll have more purchasing power each year as well.  

It might be an approach worth considering if someone's nest egg at retirement isn't quite high enough to go into the typical 2-2.5% range of the dividend growth stocks to have enough income.

[fenders53]

(03-02-2021, 07:59 AM)ken-do-nim Wrote:

(03-02-2021, 12:02 AM)crimsonghost747 Wrote: I believe the word "growth" in dividend growth investing is my main hedge against inflation.
My plan is to live off the dividend income, so as long as my portfolio's annual dividend growth rate is higher than inflation, then that should lead to a situation where I have more purchasing power each year compared to the last one.

The other option is to live off of the dividends after inflation is accounted for.  Let's say the inflation rate in a given year is 2.4%, and you are 100% invested in AT&T with its 7.4% dividend.  If you only draw 5% of those dividends and allow the rest to reinvest, you'll keep up with inflation.  If you say draw 4% and allow 3.4% to reinvest, you'll have more purchasing power each year as well.  

It might be an approach worth considering if someone's nest egg at retirement isn't quite high enough to go into the typical 2-2.5% range of the dividend growth stocks to have enough income.

Pull up a long-term chart on T.  It doesn't give one the comfort to bet the farm.  They are the king of bad M&A.  If I wasn't playing option interest tricks to boost the income I'd have little interest in it.  A basket of DGI stocks that grow the dividend can work against inflation, but you do need a very large port if this will be your only source of income. 

It depends where you desire to live during retirement of course.

[ken-do-nim]

(03-02-2021, 08:21 AM)fenders53 Wrote:

(03-02-2021, 07:59 AM)ken-do-nim Wrote:

(03-02-2021, 12:02 AM)crimsonghost747 Wrote: I believe the word "growth" in dividend growth investing is my main hedge against inflation.
My plan is to live off the dividend income, so as long as my portfolio's annual dividend growth rate is higher than inflation, then that should lead to a situation where I have more purchasing power each year compared to the last one.

The other option is to live off of the dividends after inflation is accounted for.  Let's say the inflation rate in a given year is 2.4%, and you are 100% invested in AT&T with its 7.4% dividend.  If you only draw 5% of those dividends and allow the rest to reinvest, you'll keep up with inflation.  If you say draw 4% and allow 3.4% to reinvest, you'll have more purchasing power each year as well.  

It might be an approach worth considering if someone's nest egg at retirement isn't quite high enough to go into the typical 2-2.5% range of the dividend growth stocks to have enough income.

Pull up a long-term chart on T.  It doesn't give one the comfort to bet the farm.  They are the king of bad M&A.  If I wasn't playing option interest tricks to boost the income I'd have little interest in it.  A basket of DGI stocks that grow the dividend can work against inflation, but you do need a very large port if this will be your only source of income. 

It depends where you desire to live during retirement of course.

Good point.  I sometimes think too highly of AT&T because they are such a huge company; I wonder how many people realize they own CNN, Time Warner, HBO, etc.  The DirectTV purchase is heavily weighing them down but I'm hopeful they will throw that off and start to grow again.  That said, it may be possible to build a dividend portfolio that comes to the same average of 7.4% yield that you can have more confidence in.

[fenders53]

(03-02-2021, 09:18 AM)ken-do-nim Wrote:

(03-02-2021, 08:21 AM)fenders53 Wrote:

(03-02-2021, 07:59 AM)ken-do-nim Wrote:

(03-02-2021, 12:02 AM)crimsonghost747 Wrote: I believe the word "growth" in dividend growth investing is my main hedge against inflation.
My plan is to live off the dividend income, so as long as my portfolio's annual dividend growth rate is higher than inflation, then that should lead to a situation where I have more purchasing power each year compared to the last one.

The other option is to live off of the dividends after inflation is accounted for.  Let's say the inflation rate in a given year is 2.4%, and you are 100% invested in AT&T with its 7.4% dividend.  If you only draw 5% of those dividends and allow the rest to reinvest, you'll keep up with inflation.  If you say draw 4% and allow 3.4% to reinvest, you'll have more purchasing power each year as well.  

It might be an approach worth considering if someone's nest egg at retirement isn't quite high enough to go into the typical 2-2.5% range of the dividend growth stocks to have enough income.

Pull up a long-term chart on T.  It doesn't give one the comfort to bet the farm.  They are the king of bad M&A.  If I wasn't playing option interest tricks to boost the income I'd have little interest in it.  A basket of DGI stocks that grow the dividend can work against inflation, but you do need a very large port if this will be your only source of income. 

It depends where you desire to live during retirement of course.

Good point.  I sometimes think too highly of AT&T because they are such a huge company; I wonder how many people realize they own CNN, Time Warner, HBO, etc.  The DirectTV purchase is heavily weighing them down but I'm hopeful they will throw that off and start to grow again.  That said, it may be possible to build a dividend portfolio that comes to the same average of 7.4% yield that you can have more confidence in.

I don't hate T, and occasionally even own 500 shares on a very hard dip.  See above comments, I game it for additional income because I expect the capital may continue to erode.  I can find 100 solid stocks with a growing 2.5% yield that have outperformed T over most any time period in total return. T stock price is down maybe 25% over the past 20yrs?  AVG S&P stock is up maybe 8% annually over that period.  So cut that in half and subtract it from the 7.4%.  Just diversify with some actual lower yield dividend growers and the end result will likely be better.  It's proven and will certainly be safer.  There is no safe 7 1/2% yield when short-term rates are about zero.  There is always a catch when the market turns sour.  A March 2020 or 2008 lookback will clearly illustrate that.

[Otter]

(03-02-2021, 07:06 AM)fenders53 Wrote: We aren't paying this debt down.  We do not have the political will to come close to  balanced budget.  Inflation and growth are our current options.  Better have some growth in our ports too.

Growth results in a paying down of the debt through increased tax receipts on the added economic activity. 

I think long term, inflation will take care of the bulk of debt reduction. There are some long-term demographic issues (aging population, population stagnation/decline) that aren't really compatible with traditional methods of growth. In the absence of a growing working-age population, other factors have to pick up the slack (like productivity gains). Maybe AI and other technological advances will be sufficient to sustain growth despite demographics, but that remains to be seen.