When investing, think like a landlord - MoneySense

When investing, think like a landlord

Investors often overlook a key reason for holding stocks: for income


Markets never move in a straight line, yet if you look at a five-year chart of the S&P 500 you might argue otherwise.

Since the depths of the financial crisis in 2009 to early September 2017 the S&P 500 is up more than 250%.

It’s impressive, but at some point it will end. We don’t know if it will happen in spectacular fashion like the tech bubble or the financial crisis, or whether other markets will present as a more enticing opportunity. But it will end—and soon, depending on who your listening to. You needn’t look very hard to find an investment strategist predicting a correction.

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But before nervous investors convert their holdings to cash, you may want to heed the advice of Sam Stovall, chief investment strategist at CFRA Research in New York. Stovall argues investors are too focused on the price appreciation of stocks and forgetting the other reason they hold equities: for income. In a recent note he says investors too often have the mindset of a trader, when they should be thinking more like a landlord.

“A landlord’s biggest concern is ensuring the uninterrupted stream of monthly income, not the property’s near-term price fluctuation,” he writes. And like a landlord, investors need to pay close attention to a company’s books to check up on whether it can afford to maintain, or raise, its dividends.

That might sound like more work than a DIY investor is comfortable with, but Stovall notes there is a simple way to achieve this: own the S&P 500 Dividend Aristocrats ETF. Only companies that have raised their cash payouts in each of the last 25 years are permitted in this ETF, and others like it. You don’t need to look to the U.S. to execute this type of strategy. In Canada there is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF Aristocrats ETF (CDZ).

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In terms of price appreciation you don’t see much of a divergence between the S&P 500 and the Aristocrats, but when you consider the dividends they pay out, there is no comparison. Perhaps more importantly, the Aristocrats don’t seem to fall as much when markets sour.

If you are also looking for price appreciation, Stovall also offers up this tidbit: “With the S&P 500 now yielding 2.0% versus 2.2% for the 10-year Treasury, history reminds us that since 1953 whenever the yield on the S&P 500 was within one percentage point of the 10-year yield, the “500” gained an average of 11% in price in the subsequent 12 months and was higher about 80% of the time.”