By Kris Sayce, editor, Casey Daily Dispatch
You’ve seen the phrase – we’re living through the “everything bubble.”
We’ve even used it ourselves.
Prices and valuations are high.
Earnings aren’t high enough to justify it.
And dividend yields are low.
But is it really an “everything bubble?”
And if it is, by how much is it out of control? And what can you do to combat the effect it’s having on returns?
Stick around. We’ll take a look at this idea today…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Dave Forest and Nick Giambruno. And from the founder of our business, Doug Casey.
Two Things That Move Markets – Revisited
When stock prices are high, it’s easy to make the case that prices should fall. But smart folks have done that every day for the past 12 years… yet stocks are the highest they’ve ever been.
So we’ll look at this objectively. We’ll try to help you make some sense of the markets… and help you find ways to make money without taking unnecessary risks.
First, as we’ve noted before, two things – and only two things – move markets: earnings and interest rates.
How investors view the future of both has an impact on whether stocks rise or fall. Most people will focus on the earnings. They’ll look at historical price-to-earnings (PE) ratios and note they are at or near a record high.
We don’t dispute that.
But that’s only half the story. The other side of it is interest rates. And not just in terms of the cost of money – the cost for companies and individuals to borrow.
We also mean the return on money – how much you can earn from savings, and what a super-low interest rate forces savers and investors to do.
Three Simple Charts
To illustrate this, rather than showing you the historical value of interest rates, we’ll show you the effect interest rates have had on dividends.
To do that, we’ve put together three simple charts. They tell the same story, but each in their own way.
The first chart shows the annual average yield on stocks going back 121 years.
As you can see, dividend yields are at the lowest level since 1999/2000. And over the past 20 years, on average, dividend yields are the lowest they’ve ever been.
Now look at the next chart.
In this one, we’ve presented the data to show the average annual dividends paid on a $300,000 stock portfolio.
Right now, the year-to-date dividend yield on stocks is 1.27%. On average, only 1999 and 2000 had lower average dividend yields, at 1.25% and 1.16%, respectively.
There are two things to consider with this. First, the raw numbers. On a $300,000 stock portfolio using the year-to-date yield, the income earned totals just $3,810. In 1990 – with a 3.49% yield – you would have earned $10,470.
Second, you need to look at the effect of inflation. A stock portfolio valued at $300,000 today isn’t worth the same as a stock portfolio with the same value in 1990.
So not only is the yield less today, but the purchasing power of that income stream is also less.
It’s a bleak picture.
Finally, the third chart. In this one, we look at what size stock portfolio you need in order to generate a constant $30,000 per year in income. (This is just for illustrative purposes. We haven’t adjusted for inflation.)
In 1990, you only needed a portfolio valued at $859,599 to generate that income. Today, you need a portfolio valued at three times that amount for the same dividend income stream.
So what does this tell us?
High Valuations Are Forcing Investors to Buy Stocks
The bottom line is that while dividend yields are low… they’re higher than the interest on cash savings, and higher than a bond yield. Plus, an investor hopes to get capital growth on the stocks.
In other words, rather than high valuations and low dividend yields keeping dollars out of the market, it’s actually drawing investors in.
And it’s not just stocks. Investors are looking anywhere they can for a return. They’re buying cryptos, collectibles, and other riskier assets. Anywhere they can to boost their returns.
Now, as we explained last week, you shouldn’t let anyone scare you out of investments. For a start, there’s no reason why this investment boom can’t continue.
After nearly 13 years of zero percent interest rates, the Federal Reserve isn’t about to do anything to upset the market.
So how can you play this market with relative safety, while still getting the benefit of being in stocks?
The best way to play this (balancing risk and reward) is to look at the asset class championed by Casey Research expert, Dave Forest.
Moving the Needle With Less Than $1,000
He says investors should use warrants to get exposure to higher stock prices, but without taking on full-sized stock positions.
We like the idea. It gives you market exposure… it reduces your risk as you’re investing smaller amounts… and it allows you to diversify across a broader range of assets.
Now, warrants do have an expiration date – usually dated out three to five years… sometimes longer. So while that in itself can be a risk, it’s plenty of time for warrants in emerging industries to make a big move.
Further… Dave already has a track record to prove this strategy works. His warrant picks have made his readers returns of 393%… 2,805%… and 4,942%.
And he’s passionate about helping readers move the needle on their wealth – with less than $1,000.
For example, in this essay, he shows how $850 in one of his warrants picks (the 4,942% winner) could have let you walk away with over $42,000. That same $850 in another of his warrants would have let you walk away with over $23,000.
If you can get returns even half that size, it would help offset the ridiculously low yields of today.
Look, we’re convinced this market still has room to move a lot higher. But we also like the idea of using any methods possible to reduce our risk while still getting access to big gains. Warrants are the perfect way to do that.
Editor, Casey Daily Dispatch