Welcome to our Friday mailbag edition!
Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.
Up first today, a question from Ariella about dividend stocks and dollar-cost averaging…
I am retired and don’t have a lot of money to buy investments after bills are paid. I have spent $300-500 per pay period to buy stocks you have recommended. Thank you!
I’m interested in building a separate revenue stream from my social security payments. What I need is a dividend stock that is $20-30 per share and then to invest more money in it every pay period. And then reinvest those dividends until I’m able to create an additional income stream.
This is the first time in my life that I’ve opened my own brokerage account so I’m a real newbie! I’m not comfortable investing in options or penny stocks because I don’t understand them and don’t want to take on that kind of risk! It scares me to death!
I’m more comfortable buying and holding those stocks that will grow my nest egg. So anything you can do to help would be greatly appreciated!
– Ariella S.
Hi Ariella. First of all, thank you for sharing your circumstances as a new investor. Now, I cannot give personalized investment advice, but I applaud you for considering a very pragmatic approach to building your investment portfolio.
The process you’re describing is called “dollar-cost averaging,” which allows you to build your nest egg over time without being severely impacted by sudden market volatility. It involves investing equal amounts of money at regular intervals of time, despite changes in the price of a stock or asset.
This can also be described as “legging in,” as it were, to relatively low-cost shares of companies that pay high dividends, so that you can both benefit from the dividends paid out and average the price that you pay to buy that share over time.
Dividend stocks, just to clarify, pay a dividend – or a reward – to the shareholders of a company’s stock. A dividend can be paid out in the form of cash or additional stock, and it’s a way to share profit with investors – and an indication that a company is doing well.
Larger, more established companies are more likely to pay dividends and increase dividends year-over-year. That’s because these are companies that no longer need to reinvest as much back into their business. But keep in mind, not all companies pay dividends. So if you want dividend stocks specifically, make sure you pick companies that do pay these rewards.
Meanwhile, the dividend yield refers to the dividend per share, expressed as a percentage of a company’s share. Again, I can’t give specific stock advice here. But as a subscriber of our Distortion Report service, you can find a few stocks we’ve recommended there that fit your criteria, more or less, with share prices that hover around $40 to $50 and dividend yields around 3-4%.
Next, Richard wants to know about the Fed’s three-stage pivot and its policy of quantitative easing…
How can the Fed move to Stage 3 when we are faced with the debt limit? It is my understanding that the Fed has reduced its balance sheet very little. Also, how does the reduced money supply fit into all of this?
– Richard S.
Hi Richard, thank you for writing in. That’s a great question.
As a reminder, we talked about the Fed’s three-stage pivot back in October. I said that:
The first is going to be a reduction in the size of rate hikes.
The second will be a pause in rate hikes.
And the third will be rate cuts, when it becomes blatantly obvious that the Fed is killing the economy.
Last week, I went on FOX Business to talk about this exact phenomenon. But what I didn’t say on FOX is that I don’t see the Fed moving to Stage 3 before December of this year and perhaps the beginning of 2024.
The debt limit will be raised before that. And regarding the balance sheet, you’re absolutely right. The Fed has not reduced its balance sheet by very much – by about half a trillion dollars out of nearly $9 trillion in the middle of 2020.
As a reminder, during the pandemic, the Fed purchased large numbers of U.S. Treasury bonds and reduced interest rates. As a result, it doubled the balance from $4.3 trillion in March 2020 to $8.9 trillion in May 2022, to inject money into the banking system.
In June of 2022, however, the Fed started pursuing a monetary tightening policy of higher interest rates and reduced balance sheets – to battle inflation. A reduced balanced sheet allows the Fed to avoid exposure to losses as interest rates climb higher.
Even so, when the Fed deems it necessary to stimulate a slowing economy, it will reduce rates or begin buying bonds again.
Finally, our last question this week is from Jean, who wants to know about gold and silver allocation in his portfolio…
What is the highest percentage of gold/silver you recommend for some portfolios?
– Jean B.
Hi Jean, thank you for your question. It’s one that comes up often and, in fact, came up as recently as in our January 13 mailbag.
So, the first thing I need to say is that everyone’s goals for their investment portfolio are different. Some people have an immediate need for money while others prefer to hold assets for longer periods of time. Ultimately, you’re the only one who knows what that perfect balance looks like.
But when I think of allocations like this, it’s based on an investment portfolio that you’re looking to grow over time and not money you need in the near or immediate future.
That said, I think having a 10% allocation in a combination of gold and silver is a good rule of thumb, and you should consider a long-term horizon of several years at least for this asset class.
I have a slight preference for silver because it is cheaper than gold. So I would personally allocate more to silver than gold.
On that note, if you’re curious about where gold and silver prices are headed this year, make sure to check out this previous mailbag as well, where I addressed this.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic Super Bowl weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins