From market timing to all in: dividend investors change tack

From market timing to all in: the shift towards dividends

Keeping 70% of a portfolio in cash waiting for a crash that never comes wears you down more than a drop itself. That is the conclusion reached by an investor who, after successfully applying market timing in 2020, now proposes the opposite: a staggered all in over one to three months into high-dividend stocks and ETFs yielding between 5% and 10%, with Enagas as a strong bet at up to 10% of the portfolio. Frustration is the driving force: "The stock market wears me out," he admits, and he wants a stable, low-maintenance portfolio after spending 1,500 euros in fees at Interactive Brokers.

The plan clashes head-on with buy and hold doctrine. The most common response is not buying advice but a warning: cash slowly but inexorably loses value, and waiting for the perfect crash is a form of gambling disguised as prudence. The stated horizon — two to four years — also does little to justify a long-term strategy.

Which stocks and ETFs yielding over 5% are on the table

The shortlist under consideration includes tobacco companies such as British American Tobacco, Philip Morris and Altria; telecoms such as Verizon and Vodafone; miners such as Rio Tinto; and the British postal service, which operates under the IDS brand. To these are added European real estate ETFs yielding just over 4%, and the Chinese positions already held.

The details of dividend withholding tax prove decisive. Some countries do not withhold tax on dividends: the United Kingdom, Brazil, Hong Kong, Singapore, Hungary, Estonia, Latvia, the United Arab Emirates, Qatar, Malaysia and Vietnam. This list, which circulates among investors, makes the UK market a recurring destination for regular income.

The IDS case deserves a section of its own. Its 17.38% dividend shown in screeners is not sustainable: it reflects an extraordinary payout, and the company has suspended its January payment due to the conflict with the unions. It trades at a p/e of 3, but because of its problems, not because it is a bargain. Anyone holding it must accept that the dividend may take time to return.

Is DCA or all in better when the market gives no quarter?

DCA — dollar-cost averaging, buying in instalments — emerges as the least bad option for those who do not want to give up being invested. Spreading purchases over a year, or even into the second half of the trinc year, allows prices to be averaged without needing to call the bottom. The all-or-nothing alternative is considered reckless: if the market falls right afterwards, the comfort of the dividend does not offset the red on the screen.

The debate over time in the market versus market timing remains open. Some argue that the biggest gains are concentrated in very few days and missing them condemns returns; against that stands the evidence that a flat decade like 2000 to 2010 can leave buy and hold breaking even. The 30-week moving average is proposed as a mechanical filter to decide when to enter and when to wait.

Cash is not the worst investment, but it weighs

The feeling of slowly but inexorably losing money while it sits idle is widely shared. Inflation erodes cash and the temptation to get in grows stronger as the Euribor and interest rates point to levels not seen in years. Still, caution wins out among those who believe capitulation has not yet arrived: the VIX has not spiked as it did in 2000 or 2008, and the withdrawal of liquidity from the system is only just beginning.

Hedging with options appears as a minority resource. Buying a put on the S&P 500 ETF at a strike price below the current level works as insurance: you pay a premium and cap the downside, though the cost is lost if the market rises. It can make sense for large portfolios; for a four-year dividend portfolio, it complicates more than it protects.

The closing is not a recommendation. With rates rising and inflation proving stubborn, the choice between waiting and getting in comes down to the calendar: those who cannot stomach holding cash should buy in instalments; those who can should know that waiting also has a price.