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How to Lose a Year's Worth of Dividend Yield in One Day

Investment Retirement Income

About a week ago, I blogged that "Total Return is Everything" in 10 Things I Believe About Saving and Investment and that folks need to be aware of the risks embedded in so-called conservative investments. We got the perfect illustration of that Friday in the Utilities Select Sector SPDR Fund (trading symbol: XLU).

XLU has one of the higher 12-month dividend yields at 3.27% (source: Morningstar) yet it lost 3.75% on Friday alone.

One day's loss in fund value swallowed an entire year of dividends.

With interest rates nailed to the floor--courtesy of the Federal Reserve and other global central banks--that's driving people to "chase yield" in their investments. You can especially see this with retirees who may need the investment income to cover their living expenses.

But many (most?) otherwise conservative interest and dividend paying investments have been bid-up in price to levels that are unimaginable in a more normal economic environment.

My point is not to pick on the utilities fund XLU. It's a great fund for owning a diversified basket of utility stocks. And in fairness, over the last several years the fund has seen major gains with investors clamoring for yield. Rather, my point is that global central banks have created such a distorted economic/market environment that John and Jane Doe have no clue just how much real risk is embedded in their "conservative" portfolio.

Remember, the total return you earn on an investment has two components:

Interest, dividends, and distributed gains
Increase (or minus decrease) in price of the investment

Clients of SecondHalf currently have very little exposure to such assets. For the most part, we own shorter-term, higher quality investments that haven't been bid up in price as extremely, plus we're overweight in cash and ready to buy good assets when they can be had at more reasonable prices.

Questions or concerns about your portfolio? Call or email me and let's talk about it.