What the Income Investor’s Perfect Market Looks Like

Income Investing, Investing Strategies, Markets

With the major U.S. stock indexes hovering around record highs, I often am asked about selling to lock in gains, and then waiting for the next downturn to reinvest. While I do not think a wholesale move into cash is the right move, I spend a lot of time considering what to tell my subscribers about investing in the current market. Investing now takes more finesse than was required a year ago, when broad swaths of the dividend-paying world were available at deep discounts.

Qualified dividends: An investor looks at financial charts

I see a couple of factors in play. One is that you don’t fight a positive trend in the stock markets. Trends in either direction often go much further than logic might dictate. While stock market values look pricy, there remain factors that point toward higher prices still: an economy that continues to recover from the pandemic-triggered shutdowns, and a Federal Reserve that seems determined not to let the stock markets crash.

A more critical factor, in my opinion, is that investors can still find relatively high yields, despite share and asset prices up significantly from earlier in the year. The 30 or so investments on my Dividend Hunter recommendations list currently pay an average yield of 7.9%. Investing for income, especially in the high-yield investment categories, should change how you view stock market valuations.

I preach to my subscribers that a high-yield-focused investment strategy allows us to view market values differently. One way to view the current market is that it is overvalued; stocks should be sold, with the cash held until the market corrects. But there are problems with waiting in cash for a correction. What if the market goes up another 10% before it falls? What if it doesn’t correct for months, and your money sits in a cash account earning 0.0001% per year?

Investors who try to time the market are notorious for getting it wrong. Going by your gut is not a solid strategy or valid technique.

In contrast, my subscribers know that they will start earning an 8% annual cash return if they invest now. That’s 8% in a world of sub-2% bonds and near-zero percent interest short-term accounts. Dividend-focused investors earn cash returns. The cash can be invested to grow and compound the income stream, or go into your checking account to pay for your lifestyle.

If the stock market goes down, the dividends will continue. The high-yield investor likes market corrections, which allow them to buy more shares at a higher yield. In contrast to the investor who goes to cash in fear of a market correction, the income-focused investor welcomes a falling market as an opportunity to buy low and earn more.

Think about your stock market strategy. If you fear the next market crash or correction, you may want to rethink how you invest in the stock market. The Dividend Hunter strategy allows investors to give up the fear and stay calm through both a rising and falling stock market.

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