That was a volatile week wasn’t it? Easy to forget we’re returning somewhat to the norm after being at such low volatility for a long time. A vix at 20 is really nothing too crazy.
I’ve been adjusting my portfolio to capitalize on some great opportunities in energy and commodities. I feel there is still more to go even after that ripper of a rally at the end of the week but nobody can predict the bottom so i am limping in when the opportunities come up. Earnings are just starting to come through and the bulk of the energy sector will be reporting at the tail end of Jan / early Feb. It will be interesting to see how this plays out.
One caveat with this approach is my dividend income maybe somewhat muted for a bit whilst this is ongoing but i am expecting the 2H 2015 to take off in other areas.
As insane as it sounds, i have been buying stocks where the dividends have been temporarily paused/cut – the opposite to what dividend growth investors do. It is contrarian logic but there is a method to the madness. If the company is cutting the dividend due to something is out of it’s control i.e the price of a commodity AND it is a well-run company, i think there is a reasonable chance that stock will recover, the dividend will be resumed/reinstated and things will revert back to the norm one things cycle around which they typically do. The caveat is that you may have to wait a year or two, maybe more.
So, if i have 100 shares in a company that has been cut down by 70% or whatever and i decide to buy more even though there is no dividend, the capital gains should in theory far exceed the dividend income over the long-term after reversion to the mean. It is clearly speculation, i know people like the comfort and safety of a regular dividend and a big chunk of my portfolio is that to all intents and purposes however, the big money is always made where there is the most panic.
‘Investors’ can be very short-sighted and focused on the next 3-6 months. That’s not to say this is some strategy that works 100%, you still have to be extremely careful of ‘value traps’ where things look so cheap, the stock simply has to go up. I’ve been bitten by a few of these over the years but the ones i did get right more than made up for those mistakes.
So for me, balance is key and i don’t just focus on the dividend monthly income if a really good stock is in a temporary state of panic. I look at the long-term, the capital gains will more than make up for any lack of dividend if the potential is there.
Have a great weekend.