Yahoo Finance Tips for the lazy investor
Ah summer. Time to kick back, and stop taking the world so seriously.
It’s a popular sentiment on financial markets. Staffers take vacations, trading volumes are low and major decisions are put off until September.
That’s why summer is a good time for investors to step back and let their money work for them. Here are few tips for the lazy investor to ratchet down risk and keep returns flowing.
Dividend stocks
Dividend payouts don’t take summer vacations. Shares in companies with rich and steady cash flows will reward the lazy investor with yields of between 3 per cent and 6 per cent.
Canadian financial, utility and telecom companies are normally most generous but it’s a good time for dividends overall. Investors are nervous and companies are making wads of cash.
According to S&P Dow Jones Indices, dividend payouts on the S&P 500 have moved up to 30 per cent of earnings since the 2008 meltdown. In a recent report, senior index analyst Howard Silverblatt says considering the historic average since the 1930s is 52 per cent of earnings, there’s plenty of room for dividend growth.
He also says the cash-rich sector with the most potential is technology, which has grown its dividends by 30 per cent over the past five years.
Dividend re-investment plan
If you don’t need the cash from dividends right now you can bulk up your portfolio one DRIP at a time through a dividend reinvestment plan. DRIPS channel dividend payouts directly toward purchasing additional shares, which pay more dividends, which purchase more shares ... well, you get the point.
Publicly-traded companies often offer DRIPS to stabilize their stock prices. In most cases they waive trading fees and sometimes offer their shares at a discount.
For the lazy investor it’s a good form of dollar-cost-averaging. Much of the risk of fluctuating market prices can be removed by purchasing shares in the same company on a regular basis.
Mutual funds that generate dividends will default to a DRIP to buy more of the fund for the unit holder, but in most cases you can elect to take the payout in cash.
Conditional orders
Suppose your investment has a sharp selloff when trading opens one day but you’re sleeping in until noon. That’s when conditional orders come in handy – a sort of set-it-and-forget-it feature.
The most common conditional order is a stop-loss. Stop losses are sell triggers set below a stock’s trading price that are activated if the stock falls to the set level. For example, if a $10 stock has a stop-loss set at $8, losses will be caped at $2 per share. In the event of a freefall the trigger doesn’t always hit its target, but it will stem losses.
A trailing stop-loss can be used to protect profits and lock in gains by following the stock on its way up, and trigger a sell if it backs off from its high.
The trick is to not set them too tight. An unintentional sell could get you out of a good stock and rack up unwanted trading fees. Some of the pros say ten per cent below the trading price is a good start but more volatile stocks should have more wiggle room.
Most brokers offer conditional orders as part of the trading fee, so there’s no extra cost to keep your investments safe.
However, it’s important to keep in mind they usually expire after 30 days and need to be reset - so you might want to check in every now and then.
