Lend me your mind's ear — communications and portals

Bad news, gold and dividends: When it’s pouring through the roof – what’s pouring into your portfolio?

leave a comment »

In “Gold Riot”, I wrote about gold , discussing how it might be overvalued. My post was a little early.

We recently saw a couple of interesting days in the gold market while silver corrected heavily. It’s rarely a good time to take a position in a commodity after an enormous run up. After all, when investments get sold off, there are some powerful players out there, and they can cause some big price movements. For example, Goldman Sachs.

Some investors are now taking positions at better prices, still, the behaviour of gold and other metals has melted some hearts. Newbie investors heavy on silver must have had some palpitations during the spectacular volatility.

With everyone talking about gold, and with it seemingly pouring bad economic news at the moment, how do dividend stocks fit into the picture?

My focus is more on average investors than speculators, and the average investor generally has less of a stomach for volatility. Many investors aren’t even aware there’s quite a difference between gold stocks and gold bullion and how they both perform. There’s a lot more volatility in gold stocks, and gold stocks’ performance is based on the outlook of the underlying companies. (For more on this, see the above link “Gold Riot”.)

While silver was making the headlines for all the wrong reasons, dividend-paying stocks have outperformed. “Get paid to wait” is the mantra of investors in dividend-payers. During difficult periods of volatility, those dividends are smoothing out some of the volatility in price movements. When comparing the iShares Dow Jones Canadian Select Dividend Index to gold as a commodity, gold still did pretty well if you bought early, however, many bought very late — rarely a good thing. It would have been better to wait for a correction.

iShares Dow Jones Canadian Select Dividend Index Fund, S&P TSX Global Gold Index and XIU (nearly a proxy for the S&P TSX 60)

Many investors don’t have the time or don’t want to spend the time glued to the markets. While nothing is ever guaranteed with any investment, dividend-paying stocks will give you a little more comfort. The highs may not be as high, but the lows are also not quite as low.

When news is uniformly bad, remember that stream of dividend payments pouring into your portfolio. The managements’ of dividend-paying companies believe enough in their businesses to share some of the wealth with you.

So how did these asset classes make out? Dividend-paying stocks returned more than 10 per cent while gold stocks were down 15 per cent over the last year. Gold stocks have disconnected from bullion for now as regards performance. It happens.

Bullion had a good return at about 18 per cent but with a lot more volatility than dividend-payers. Gold stocks are potentially even more volatile. My target audience is more the average investor, so I won’t over complicate this — gold bullion has had a lot of its recent increase because of bad economic news — this is a bit of a simplification. More is involved in the price of gold, but does the average investor need complication? What is important is that if the news outlook changes, so might the performance of gold.

Remember, if you own a broad-based Canadian equity fund, it probably has somewhere between 15 – 20 per cent of its holdings in gold or other mining stocks. How much gold do you want?

Better yet, how much gold does a proper weighting allow for? If you’re not a speculator, keep your gold holdings manageable at 5 – 10 per cent of your total portfolio. A good fund manager has a lot of intelligence when making decisions on gold stocks. Do you? If you’ve decided to hold a significant weighting in gold stocks or bullion, you have become a speculator. Do you have time to watch your holdings with the eye of a fund manager or a speculator? Probably not.

An investor holds shares in a business and shares in business ownership. The average investor would do better thinking like a business owner rather than a speculator.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: