- An old adage advises leaving the markets for 5/12ths of the year.
- Historical returns show May through October underperform the rest of the year.
- Income investors have additional considerations to take into account before even thinking of following this adage.
- We recommend some additional securities for your income portfolio that you may have overlooked recently.
- Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »
Co-produced with Treading Softly
Whenever May comes rolling around, we hear about the old adage, "Sell in May and go away". We often get asked why people like to use this saying and what validity it has. Here at High Dividend Opportunities, we look at things through the lens of our Income Method. This means we do not look at the market like total return junkies or day trading fanatics, but as long-term income investors who carefully craft their portfolios for long-term success via immediate income investments. We sprinkle in value investing principles to help generate additional alpha - which, through portfolio rotation, we capitalize into more income generation.
We are like the landowner who sells trees to International Paper (IP) or Enviva Partners (EVA). We realize that rotating our matured investments for new opportunities can generate additional growth and income when carefully practiced. We're not burning down our portfolio on hopes and dreams, but rotating via meticulous research.
So today, we wanted to look at this adage from the lens of an income investor.
A Little Backstory
This saying hails back from England, when higher-class individuals would leave London in May to summer in the country before returning in mid-September. Essentially, the upper crust - and their spending - moved off to other locales for a span of time.
This means the major wheels of investing and commerce went with them.
As the stock market took hold in America, this adage became focused on May through Labor Day or often May through the end of October. This span of time was the most common vacationing time for those actively involved in the market, and volume decreased accordingly. Usually, when buyers are off vacationing, shorting increases and lower volume allows for faster price drops.
How Does This Hold Up in the Markets?
Overwhelmingly, the November through April periods have outperformed May through October. According to a 2017 Forbes article:
According to Almanac data, since 1950 the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.
Looking at the S&P 500 (SPY), the trend seems to hold up as well:
May 1, 2019 through October 31, 2019 performed admirably but still underperformed the prior November 1, 2018 through April 30, 2019 time frame.
But we must ask ourselves if there is a real benefit to sitting out of the market during May through October. In 2019, there was no benefit from sitting it out, as you simply missed out on approximately 4-5% returns. Since 2012, selling out in May resulted in missing some serious returns from the S&P 500:
(Source: LPL Research)
While often the November through April span produced greater returns, the overall picture shows that consistent negative returns in May-October have not been seen in recent years.
Right now, as investors looking at this pattern, you would have forfeited a large portion of your capital gains by selling out during this portion of the year. As income investors, we need to think long term and not fall for gimmicky sayings. If you held a monthly-paying security, you would be skipping out on five of its 12 dividend payments, so your total capital would be diminished if you had to make up those dividend payments by cannibalizing your total money pile.
Consider the PIMCO Dynamic Credit Income Fund (PCI), for example, from May 1 through October 31, 2019, it provided a total return of 11.15% and a price return of 6.56%.
Now, take into consideration that during this time it would've paid out $1.0242 per share in distributions. See the chart below for the distributions during that period
(Source: Seeking Alpha)
On May 1, 2019, PCI had a share price of $23.49 per share. The missed distributions equal a 4.36% return on your investment during that period. If you held $10,000 worth of PCI on May 1, instead of it rising in value, your cash pile would diminish in value if you had to compensate for lost dividends. Now you walk away with only $9,564 to reinvest after taking out the equivalent loss to your investment income.
Timing the Market vs. Time In the Market
The idea of selling out in May and returning when the snow has fallen again - or November, depending on where you live - is an aspect of market timing. Essentially, you feel that playing the market by not remaining in it is the best route to achieve your goals.
Income investors use their dividends to soften the blows of market drops and supercharge the returns of market recoveries. Right now in this bear market, some preferred securities have rallied from their bottoms by more than 100%. Dividends invested into those opportunities have already produced outsized returns versus those simply sitting out of the market if they timed it right.
Income investors also need to factor in their reliance on dividends for daily spending. Retirees, especially those who use their portfolios as a way to augment their income streams, need to understand that sitting in cash does not mean preserving value versus the market if they are still pulling from that cash to supplement lost dividend income. For income investors, placing your funds into securities that pay reliable steady dividends or distributions is the best means to a sound and safe retirement income stream. Gamification of the market has led many to chase a day trader's dream of the next big score. Don't be a gambler. Be an investor. Time in the market for income investors vastly outperforms timing the market when it comes to developing a steady dividend income stream.
Consider These Securities For Your Income Portfolio
The Reaves Utility Income Fund (UTG) is a CEF that invests in utilities and infrastructure companies. These are two of the most defensive sectors because we all need electricity, water, heating, and Internet in good and bad times. Regulated utilities are steady stable income producers, and wrapping them in a Closed-End Fund allow you to get instant diversification in the sector with high yield. UTG is actively managed by Reaves, the most renown manager in the utilities space, and works to maximize your returns. UTG also offers monthly distributions versus quarter of most utilities This makes budgeting easier and reinvestment opportunities come more often. UTG's yield was at 7.3% on 05/04/200.
Newtek Business Services Corp., 5.75% Notes Due 8/1/2024 (NEWTL) is a baby bond offered by one of the most solid "business development companies": Newtek (NEWT). NEWT is a major beneficiary of the Paycheck Protection Program (PPP) and SBA loans, having already taken a larger-than-traditional role in aiding their portfolio companies with payroll services. NEWT is in a very sweet spot to outperform, and the bonds offer a great conservative way to take advantage of that. The baby bond NEWTL yielded 5.8% as of 05/04/2020.
As investors, you will hear various adages or myths from the investment community timed with various parts of the year. We've tackled some of them before, and again we've seen this yearly myth rise up from the ashes.
We have seen where, historically, the back end of the year outperforms the middle as far as overall gains. This doesn't mean an income investor or retiree should sit out 5/12ths of the year over the chance it will not perform as strongly as the rest of the year. Furthermore, income-reliant investors need to consider the effect of cannibalizing their portfolio cash value while waiting to reinvest. This alone makes the hard task of making up for lost time even more insurmountable.
If you are an income investor, focus instead on our task at hand: developing a strong income stream that provides the steady cash flow you desire and want. You can use this cash flow to live, to reinvest in mispriced opportunities, and to impact your world that otherwise would not be possible without the power of dividends. Majoring on the minors often outweighs cashing the myths and ghosts from the past.
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This article was written by
Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.
Analyst’s Disclosure: I am/we are long NEWT, NEWTL, PCI, UTG. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.