I must be getting cranky in my old age. Maybe I’m having a ‘millennial’ life crisis. Maybe I need to log on to Snapchat (SNAP) and swipe through some Kim Kardashian posts to rejuvenate my brain and remind me that I am young, fearless and invincible. Is there an app I can download that increases my tolerance or improves my sense of humor?
Because when I read a recent post about how a fellow millennial believes he can “easily beat the 5.5% (on his student loans) interest rate if I invested the money,” my knee-jerk reaction was to reply: “And I can easily beat LeBron James in a dunk contest!”
On 7 foot rims… maybe.
I can’t speak for other income investors, but I would be quite content if I found safe equity (or even debt) paying 5.5% today. Heck, I even jokingly offered (in the comments) to loan the guy some money if he had decent collateral. We’re here to seek alpha, and I support the intrepidness of such a statement, but a part of me wonders if we’re entering the latter part of a euphoric market where:
Now this is not a doom-and-gloom Marc Faber warning about how the market is going down 60%. I’m not going Ron Paul on everyone saying a bear market is imminent and to load up on gold. Heck, I’m not even declaring the market at all-times highs is excessively overvalued (overvalued, yes. Excessively – debatable). But I will say that based on my research tracking investment grade equity and debt, you would be hard-pressed to beat 5.5% safely in the market today. It certainly isn’t easy.
Can you obtain 8%, sure. You can buy one of the ETNs mentioned (MORL) in his portfolio and start with an initial yield over 18%. But this type of leveraged REIT comes with heightened risk and a decent chance of a shrinking payout:
But we millennials are young and have time on our side. It’s okay for us to accept some risk since we have time to remedy our mistakes. That is partially why I invested in Tesla (TSLA) a year ago and own a few nano cap companies like Biocept (BIOC). I understand that I may lose a significant portion (perhaps all) of my investment, but the percentage of my portfolio allocated toward these picks is less than 2%. Maybe I’ll get lucky. Maybe not. Either way it is not acceptable to jeopardize my financial freedom via reaching for high-yield.
Don’t Squander the Best Asset You Have: Time
I have no doubt that the author of the original piece is adept at making money in the market and sifting through the noise to obtain reasonable returns. Designations of CFA and MBA do not come easy. I have friends who’ve obtained those coveted distinctions - the CFA pulls in over $330K per year. That’s an enormous amount and in some respects may allow him to take more risks in his portfolio than the rest of us.
But most of us aren’t so fortunate. For those regular Jane and Joe millennials making under $100k per year, our greatest asset is time. Time in the market beats timing the market. That’s why reinvesting shares of high quality dividend paying stocks has such strong appeal. Take a look at the chart below to demonstrate the appeal of lengthening your holding period with data compiled from 1928:
The longer we hold, the less of a chance we have of losing money. And that is the universal number one rule in the market: don’t lose money. But what is the outcome (return) of the chart above when one holds for those 10 years?
That’s a pretty revealing trend. The more time you spend holding shares in the market, the less chance of loss and the greatest chance of gain. The fact that millennials are under age 35 means that while we don’t have the capital nor experience/patience of older investors, we do have extra years for time to work in our favor.
The Appeal of High-Yield: Retire Early
I mentioned above I am wary that a high-yield strategy employed by millennials will squander the very best advantage they have, time. But I understand where the impetus comes from to pursue the path. The author of the original post is not just trying to secure a sound financial future for him and his family by age 65. He is on an accelerated path to early retirement. It would be quite a challenge to pour money exclusively into an S&P 500 index fund distributing 2% a year and expect to receive enough income to cover expenses. That would take a few million dollars which most of us don’t have. Two percent won’t cut it for current retirees, and it doesn’t cut it for those who aspire to early retirement.
However, that reach for yield is fraught with pitfalls. Some of the securities from his portfolio have sustained dividend cuts along with steep capital losses.
Capital Product Partners (CPLP) is down 54% in the past 5 years and cut its dividend 66% in 2016.
New York REIT (NYRT) is down 22% since mid-2014 and is no longer paying a dividend.
Ashford Hospitality Prime Inc. (AHP) is down 55% since late 2013.
Savvy traders who swoop in at opportune times can make solid returns on the names above; however, these are not the kind of companies that produce reliable income safely. And if the goal is to sleep soundly in retirement, you do not want to stress about whether the paychecks you depend on are at risk of being reduced or eliminated. You don’t want to be forced to go back to work.
But believe me, there is no schadenfreude intended in highlighting the perils of the securities above.
I have my own experience chasing high-yield… blunders I now regret. I am a former holder of Seadrill (SDRL). I still own shares of Frontier (FTR) and CenturyLink (CTL) purchased long ago. These blemishes in my portfolio serve as a reminder that when a dividend looks too good to be true, it usually is. While the market doesn’t price every security perfectly, risks are accounted for and reflected in the share price.
The original poster has student loans outstanding at 5.5%. It is my opinion that he is better served eliminating this debt before investing in income-producing securities. In order to beat the 5.5% (after taxes), he is forced to invest in unappealing securities which jeopardize his capital. Eliminating the debt is a guaranteed return.
Second, I would recommend that other millennials focus on three other objectives if they desire to be financially free or retire early. The first, save more. Each time I log into one of my savings accounts I am notified that if I increase my savings rate by even a small amount ($150), the value would be much higher down the road:
The more you squirrel away, the more pronounced the chart above will look. Save early, save consistently, and save a large percentage.
The second item, invest in yourself to increase your income earning potential. Earning an MBA or a CFA takes dedication, time, money, and tons of hard work. But ultimately, the reward is an exponentially higher salary if one perseveres through the curriculum. Millennials still have many years to change careers, go back to school, or kick start a side gig that produces additional income. Spending less has its limitations and is not as empowering as making more.
Finally, be very mindful of the companies you invest in. Beware of the enticement of high yield. You are better served focusing on increasing your stake in blue-chip stocks which will outperform in the long haul.
In June, I wrote a post outlining a counter to FANGS for dividend investors called: MOATS. MOATS has 5 securities dividend investors should have in their portfolios: Microsoft (MSFT), Realty Income (O), Apple (AAPL), AT&T (T), and Starbucks (SBUX). All of these companies are growing the dividend each year, have high-quality assets and investment grade credit. These are the type of companies where income investors can DRIP shares reliably without fretting about market timing or the reliability of the distribution. These are just a handful of companies worthy of your dollars.
Early retirement is achievable for millennials. Time is on our side.
Disclosure: I am/we are long SBUX, O, T, MSFT, AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.