My usually-very-reliable supermarket ran out of mangoes the other day. There were no mangoes to be found anywhere – not even a slightly wizened specimen that sometimes lurks at the bottom of the fruit baskets. It was frustrating. The tropical drupe was going to be the centrepiece of my dessert. But I guess I can live without mangoes for one day. There is always something else that I do instead. A quest for safety The same can’t be said of conservative investors who go not in search of mangoes but go on a quest for safe investments. These risk-averse investors…
My usually-very-reliable supermarket ran out of mangoes the other day.
There were no mangoes to be found anywhere – not even a slightly wizened specimen that sometimes lurks at the bottom of the fruit baskets.
It was frustrating. The tropical drupe was going to be the centrepiece of my dessert.
But I guess I can live without mangoes for one day. There is always something else that I do instead.
A quest for safety
The same can’t be said of conservative investors who go not in search of mangoes but go on a quest for safe investments. These risk-averse investors have historically put their trust in bonds.
Pension funds, for example, need to match the monies they receive today with the payouts they are obliged to make later on.
Crucially, the payouts must be guaranteed. And investment-grade bonds could provide just that kind of assurance.
Unfortunately, central banks have pulled the rug from under everyone’s feet, even pension funds.
Central banks have been buying bonds as though they are going out of fashion. They are printing as much money as they can to buy back government loan notes, which has the effect of depressing interest rates.
Money in our pockets
The process, which is known as Quantitative Easing, is intended to pump money into economies that should, theoretically, see the cash trickle down into our pockets.
But it hasn’t. At least not in a way that would make our lives appreciably better.
And it’s not through a lack of trying. Central banks have bought so many bonds that some have run into problems.
The Bank of England literally ran out of bonds to buy a few months’ ago. So too did the Bank of Japan.
Some observers now believe that something that had started out as an ingenious scheme by central banks to save the global financial system has turned into a futile attempt to save their collective blushes.
But some banks could be about to admit that they have made a mistake.
Can’t please everyone
The desperate action by central banks had even fuelled protests in the UK. Demonstrators have called for an end to Quantitative Easing. They wanted the Bank of England to “create money for people, not financial markets”.
Unfortunately, their protests have fallen on deaf years.
The Bank of England said Quantitative Easing was necessary. It added that it is rarely possible to please everyone, all of the time.
So we are where we are right now, whether we like it or not.
Central banks have, it seems, developed an unhealthy taste for bonds. That puts us investors in a difficult position, especially if we are looking for income.
In the good old days bonds would typically yield more than shares. That’s because investors were willing to accept a lower rate of capital growth in exchange for a higher yield.
But now, bond yields are lower than the yields we could earn from shares.
And it’s not just government bond that have been affected. Corporate bond yields are lower too, and don’t even get me started on bank deposit rates.
So it is little wonder that many investors – even risk-averse investors – are turning to dividends.
But we need to tread carefully. Not all dividends are created equally.
A check list
Picking a share simply because of its above-average yield could lead to problems later on.
A dividend is a portion of the profits that a company has made. So it is important to check that the company is actually making enough money to pay dividends.
It is also important to make sure that the company has adequate cash to make the payouts. Borrowing money to pay dividends is not clever.
There are other criteria that we should consider when choosing dividend-paying shares. So do take your time.
Remember you are picking shares that have the ability to grow their payouts over time.
You are planting trees today so you can sit in the shade tomorrow.
So prepare the ground properly and choose your saplings carefully. Get it right and you could earn a rising income for life.
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