The new economy is causing an alarming trend in dividend paying stocks, one that could possibly end badly and have a devastating impact on Middle Class investors.
Dividend paying stocks have long been the favorite of conservative, long-term investors. That strategy paid off handsomely during the great stock market bull run of the 1980’s and 1990s.
And once the current wealth cycle is over, dividend paying stocks may once again make sense to add to our strategy. But we’re not there yet.
In fact, the horrendous performance of the stock market over the last decade should be the norm until the wealth cycle is over and the wealth transfer complete.
Which means stocks will remain volatile and extremely risky for quite some time.
In the current wealth cycle, we are content to avoid the stock market and all of its hidden risks altogether. And that includes dividend stocks.
Because a new market trend is blasting a warning siren for anyone willing to listen.
We’ll tell you why this trend could be disastrous for dividend stocks in the very near future and how you can position yourself for incredibly lucrative returns without investing a single penny in the stock market.
It’s not About the Stock Market
But before we dive in, let’s get something straight right away (especially for our new readers).
We are not a financial advisory service. We don’t provide stock picks. We don’t analyze PE ratios or dissect balance sheets.
So why are we even mentioning dividend stocks?
Well, we know that many of our members (and potential members) still have money in the stock market. And some have LOTS of money in the stock market (like 80%-100% of their investments).
And much of that money is in dividend-paying stocks.
Which is fine if you bought those stocks in 2009 at dirt cheap prices and have been earning steady income from them since.
But here’s the problem (and the alarming trend): Many people are just getting into dividend stocks right now…and it’s creating a mini “dividend stock bubble.”
Look at the numbers. Longtime dividend paying darlings are having a banner year. Hershey up 17.1% this year. Coke up 19.4%. Wal-mart up 25.8%.
Those are unheard of gains for dividend stocks. And it’s creating a very real (and dangerous) bubble.
We call it a “mini bubble” because it won’t rock the financial world when it pops.
It probably won’t make the front page news.
But it could be devastating to the small investor who’s just joining the bandwagon now.
How a Small Investor Gets Sucked Into the Bubble
Take Bill, for example. He had $50,000 sitting in his savings account.
It was his “emergency” fund … just in case he lost his job. Or something worse. Protection for his family, really.
But at the beginning of 2012 he realized that he only earned 0.87% interest on that money for the entire previous year. And the year before. Yuck!
Jason was smart enough to realize that he wasn’t even keeping pace with inflation. Not even close.
So Jason looked for alternative “safe” investments. He checked out Certificates of Deposits (CDs), municipal bonds, treasury bonds, and money market funds.
But the yields on all these were disappointingly low. And you had to tie your money up for a long time. Not good for an “emergency fund.”
Plus the government-backed bonds seemed riskier than ever.
Then one of his pals at work suggested looking at dividend paying stocks. So Jason did … and he liked what he saw.
The Traditional Case for Dividend Stocks
Big, strong companies like Coca-Cola, Wal-Mart, McDonalds and Hershey were offering yields between 2%-4%.
Jason had never been impressed with yields like that in the past. But now, compared to the piddly amount he was earning in his bank account, it looked like a huge windfall.
So Jason made the jump. He took his fifty grand out of the bank and invested it in dividend paying stocks.
Jason is a cautious investor, so he “diversified” by buying shares in four different companies that paid dividends.
He didn’t want all his eggs in one basket. (Too bad nobody told Jason that true diversification means investing in different asset classes).
Jason didn’t know much about determining a good valuation of a company. So when he picked his companies to invest in, he just looked at the yields. The higher the better.
Plus he figured that since he was investing in big, strong companies that always raised their dividends, it must be a good deal. His friend’s financial advisor even said so.
And since everyone else was buying up dividend stocks, it must be the right time.
Besides, the yield was decent – and he was going to be getting regular income, right?
How will Jason do?
It’s a good question. He might do very well. But the odds are against him. Here’s why…
It will depend partly on how the market reacts to some upcoming and potentially devastating events and partly on how he responds to the wild swings of the market (even in the so-called “stable” dividend stocks).
But most importantly, there is lurking in the shadows …
One Scenario That Could Devastate Dividend Stocks
The trap in Jason’s plan is that he’s putting “emergency money” into a vehicle that can lose value.
Even though Jason’s investment could turn out very well for him in the long run, it’s also possible it could tank in the short term.
That’s the nature of the stock market. And large, strong, dividend-paying stocks have tanked in the past just ask Bank of America investors.
And guess what?
There is an event looming in the near future that could trigger such a sharp move.
Some analysts are calling it a “fiscal cliff.” Others are calling it a ticking time bomb.
But our favorite term is one that we heard first back in February 2012.
Some Congressional aides call it…
Taxmageddon
It refers to December 31, 2012.
Why that date?
It is the date that the so-called Bush tax cuts are set to expire.
Originally these tax cuts were supposed to expire at the end of 2010.
But President Obama introduced legislation just weeks before the expiration date to extend the tax cuts for another two years.
Now, Obama’s tax cut extension plan is set to expire at the end of this year.
Will there be a last minute rescue like 2010?
Maybe.
The Congressional Budget Office (CBO) released a study on May 22, 2012 that indicates another extension may be coming.
The CBO warned that letting the tax cuts expire in the current economic climate could have severe short-term effects.
Severe enough to cause another official recession. As if we’re not in one right now.
But a lot will depend upon the results of the November elections.
So what does all this tax business have to do with dividend stocks?
A lot!
One part of the so-called Bush tax cuts is the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).
In that piece of legislation, the IRS taxes qualified dividends at a flat 15% rate regardless of the income bracket of the holder.
If that provision expires in December, it will cause a huge tax increase for dividend income in 2013.
Since many wealthy people own large blocks of dividend stocks, they may decide to unload them starting in 2013 or sooner as we’ll explain in a minute.
That’s because these wealthy investors could see their dividend income tax rate jump from 15% to 39.6%.
And when you throw in the 3.8% tax that will also get slapped on top as part of Obamacare passed in 2009 top tax payers could see their dividend income taxes rise from 15% to 43.4%.
Whether you think such a tax hike is good or not the reality is that such a large tax increase will likely scare many large investors away. Because they can always find greener pastures for their money.
So if these big ‘smart money’ players start dumping dividend stocks, the share prices will plummet.
And Jason and hundreds of thousands of other middle class investors will be left in the dust holding onto their newly-purchased dividend stocks that just lost 20% of their value. Or more.
It’ll be like 2008 all over.
Yes, if Jason holds on to his dividend stocks long enough, the price may come back. And the quarterly income will make up for it some of it.
But it will take time to make that money back. Maybe even years. Or decades.
In the meantime, what if Jason loses his job? What if he needs to tap into his “emergency funds” for medical expenses before the stock rebounds?
That’s the trap.
And since the Fed has continued to suppress interest rates it’s almost impossible to get a decent return on most “safe money” savings vehicles.
So thousands of small investors have been lured into dividend stocks this year as the only way to get a decent yield.
All these new investors and the little guys are piling in to dividend stocks has created this mini bubble.
Unfortunately, (as it usually happens in the market)…
The Little Guy Becomes Shark Bait
You see, the market is always looking forward.
And a lot of what happens in January will depend on who gets elected in November (both in the White House and the Senate).
We wouldn’t be surprised to see a big sell-off in dividend stocks. It might happen right before the election.
Or depending upon who is elected, it could happen right after.
If it does happen, those who’ve owned their stocks for a long time and have been collecting dividends for years won’t be impacted much.
It will be the little guy who will get slaughtered. All the Johnny-come-lately investors.
Guys like Jason just trying to find a place to earn a little interest on his money.
So, what is a guy like Jason to do?
The New Wealth Blueprint: Better than Dividend Stocks
The big question is this: Is there any place to put money where you can earn a decent return and NOT have to risk losing it all (like the Russian roulette of the stock market)?
Absolutely.
In fact, that’s the very reason we put together the Wealth Blueprint.
The foundational strategies of our Wealth Blueprint will preserve the principal of everything you put in (meaning it can’t “crash” like a stock can).
Plus you can still earn a decent return.
For example, our Banking Strategy safeguards your deposits while at the same time earning a fixed yearly return from 4%-10% and higher.
But the real strength of the Wealth Blueprint is when you combine strategies and start “stacking” your investments.
It gives you an almost unfair advantage over anyone who has their money tied up in other investments – including dividend stocks.
Because with this Banking system, you can keep earning interest on your “deposits” while you simultaneously invest that money somewhere else.
Sound too good to be true?
It seems like it … except there are thousands of people doing it right now….
And getting fantastic results.
Like Susan D., a 38 year-old physician from Australia who sent us this note:
“Once I set up my Cash Flow Bank, I immediately started making a return of 10%. But within 2 months I was making 17%+ as I ‘stacked’ several deals via the Cash Flow Bank. I am now using the newly gained profits to buy extra gold and silver. It’s almost like getting free GOLD for my family (because that money would have normally gone to the bank as their profit). I truly feel ‘empowered.’”
If you’d like to get a better return than your saving account (who wouldn’t?) …
…but don’t want to put up with the hassles or the risks of the stock or bond markets…