2 Key Investment Insights from the Pandemic and Civil Unrest

It’s easy to get lost in the gloom of widespread illness, lives and careers put on hold, businesses shuttered, loneliness and depression, and a general sense of fear and trepidation that have resulted from the onset of Covid-19 and the lawlessness that erupted in many of our cities.

Who would have expected, as the US was experiencing the greatest economic boom ever, that a mere few months later we would be facing double digit unemployment, a 30+% decline in GDP, and the burning of some of our greatest cities?

These crises have left many Americans scrambling to provide for themselves and their families and, like most tragedies, there are valuable lessons to be learned, or reinforced from this.

Insight #1 – You Need Adequate Emergency Funds

The economic shut-down of American business left many without any means of support. What was initially intended as a two-week pause has now, in some states, reached six months with still no end in sight. The financial pain was especially acute on the lower rungs of the economic ladder. It took time for the government to respond with help and, in the meantime, people were left in the lurch.

At Catholic Investment Strategies, we always recommend that our clients maintain, at the very least, three months’ worth of expenses in ready cash. Three months is what we view as the minimum amount. Better than that would be to have enough to cover twelve to twenty-four months.

I know what you’re going to say: I can’t put that much aside. Well, I disagree. It is possible if you start small and just keep at it. For instance, suppose you have a coffee habit, spending $6 per day at your local coffeehouse. You could eliminate that expense, or find a cheaper alternative, and that would enable you to save (at the full $6) $120 per month. Cut out or reduce another luxury expense of roughly the same size (let’s say to the tune of $130 monthly) and in a year you would accumulate $3,000 in your emergency fund. While that might not be enough to cover your full normal expense load, it could be sufficient to pay the rent/mortgage, keep the lights/heat on, and put food on the table until things return to normal.

Insight #2 – Investing for Income

We often talk to clients about the merits of using a portion of your investments to produce a continuing stream of income (as opposed to investing solely for capital gains). An advantage of this approach is that regardless of the normal ups and downs of the economy, your job, or even the stock market, if you’ve chosen your investments wisely, the cash stream will continue without interruption.

The primary vehicle that we’ve been using for this in the current low interest rate environment is dividend paying stocks. History has shown that, in addition to the income stream dividends provide, stocks that pay dividends actually have performed better than those that don’t pay dividends over various, lengthy time periods. For example, research by Ned Davis & Associates over a 41 year period showed that dividend paying stocks registered annual average gains of 9.28% while stocks that did not pay dividends rose just 2.34%.

One of the attractions of good dividend paying companies is that, unlike investing in a bond where all you will ever receive is the never changing, level interest payment promised by the bond, as the companies grow they will increase dividend payments as their earnings grow. To follow this investment approach, it is key to focus on the financial health of the companies owned to make sure that the dividend is well underpinned. Equally as important is to invest in a portfolio of companies since any single company can fall upon hard times at some point even when carefully monitored. With a portfolio of solid dividend payers, the faltering of any single holding is much less likely to derail the upward march of your dividend income.

Having a steady stream of dividend income as a back-up to your regular paycheck can add a level of security to your finances. Imagine how good it would feel, in the virus crisis or any future crisis, having monthly checks arrive to provide an offset to an absent or shrunken payroll check. Or, absent a crisis, having those checks in addition to your pension and Social Security payments.

When the going gets tough, there is nothing like having cash on hand (your emergency fund) and cash coming in (your dividend checks) to help you navigate the storm.

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