Everyone loves reliable income.
And most days you’re relaxing, collecting your checks and thinking about more important things.
But financial news is reported all day, every day, and bad news gets more attention than good news.
Sooner or later your perfect day will be interrupted by some bad news about one of your investments.
When bad news interrupts you, remain calm and do some analysis.
Most of the time you can dismiss the news as noise, but sometimes you really do have to pay attention.
But how do you know if the news is important?
Your bad news most likely will fit into one of these situations.
Does the News Impact Your Specific Investment?
Before you panic, make sure your investment is even involved.
Mainstream financial pundits like to take the thousands of companies out there and lump them into 11 sectors.
It’s inaccurate AF, but it makes their job easy.
When the news says the tech sector is pulling back due to disappointing iPhone sales, what does that mean for your Microsoft dividend?
Well, Microsoft is almost unaware of iPhone sales.
Not even a footnote’s worth of Microsoft’s income depends on iPhones.
Microsoft just happens to be in the same “tech” sector that all the stock traders are now selling.
The price of the stock has dropped, and day traders everywhere have an opinion about it.
CNBC can provide a lot of infotainment debating future moves in the stock price.
But remember, your yield is the income derived from your original investment, not today’s news.
Your ROI and income never change unless something disrupts your collections.
Has anything happened that will disrupt cash flow at the company?
How reliable do their future payments look?
In most cases, a market fluctuation in any sector is easily ignored.
If you own Apple, you might want to explore the news a little further.
If you own Microsoft, you quickly realize the news has nothing to do with your investment.
Day to day changes in the stock price have no impact on your dividend.
And anything else you might do today is a better use of time than predicting the future stock price.
What if the Bad News is Rising (or Falling) Interest Rates?
Isn’t it great that vitally important news can be created no matter which direction interest rates go?
It’s not easy for CNBC to fill all those hours.
And don’t forget Fox and Bloomberg are competing for the same audience.
Thankfully interest rates are always a big concern, and they can all predict future moves with at least 50% accuracy.
But what does this news mean for your investment?
For example, the Fed is raising interest rates right now, so the bid price from someone offering to buy your Treasury note most likely is going down.
There is market concern over bonds losing value; maybe fixed income investments are not the safe haven you thought they were.
Learned pundits everywhere are explaining “duration” to people who didn’t care about it yesterday.
And for bonus coverage, you can go to their website and learn whether you prefer the Macauley version or if you need modified duration.
But do you really care?
If you are an income investor, you bought for the income.
People buying that bond today are paying less for it.
But you’re not selling.
Unless the headline says the US Treasury has disappeared, you can relax and collect your income same as always.
Your ROI hasn’t changed.
In fact, nothing has changed.
There is no news here at all.
CNBC along with the rest of the financial news industry manages to get a whole lot of people worried about interest rates, almost every day.
Someone shopping for a mortgage might want to pay attention.
But an income investor has little concern about today’s selling price for their stock or bond.
Are Bonds a Safe-Haven?
You buy one because it promises to pay a certain interest payment.
You collect that payment until maturity when you get the principal back.
There is no market risk at all in a standard bond scenario.
The only risk is if the payor defaults.
Investment grade bonds default at a rate below two-tenths of one percent per year. Many years it’s below one-tenth.
And of course, the US Treasury has never defaulted.
The next time someone tries to get you concerned over the safety of your bond investments, ask if those sound like risky numbers.
Those people have been confused by watching too much television.
Or maybe from being on it too much.
OK, so now we know that sector moves and interest rate changes are news stories with zero value to an income investor; they’re just the noise required to fill the TV shows and magazines.
But What if the Bad News is Really About Your Investment?
Microsoft gets hammered in the press several times every year.
The sky is falling for some reason whenever the news needs some stories.
Microsoft’s stock price varied by more than 30% from top to bottom over the past year.
What did this mean for your income?
Microsoft raised their dividend 9% in November.
Don’t you feel a little sorry for investors who reacted to the price drops just a few months earlier?
Too bad they didn’t remember share price movements have nothing to do with income.
Most of the time, market news has little to do with actual operations and much to do with emotions.
Emotions cause fluctuations in market prices, but they have no impact whatsoever on dividend or interest payments.
Income investors can ignore all the emotion expressed by the markets.
Just show me the money!
Once in a while, the news really will be a reason to think about your investment.
What if you own Apple when the news about disappointing iPhone sales is released.
Apple is relatively new to an income investor’s radar.
Their dividend only began in 2012, but the dividend yield on shares bought today is actually a little better than Microsoft’s.
After years as the day trader’s favorite growth stock, Apple is now held by many investors for income.
And there are also Apple bonds.
Even though the news is always about their big pile of cash, Apple has about $16 billion in bonds out there.
So iPhone sales were disappointing last quarter.
What does this headline mean for income investors?
Apple has over $200 billion in cash and generates a boatload of cash income on operations.
A quick look at their financials tells you that your income is quite safe even if iPhone sales decline for a long time.
Just look at this chart. It shows that even though the share price may have declined 14%, the revenue, net income, and dividend is all growing.
And I usually find that when share price lags dividend growth, there is a gap to be filled.
Share price will come back.
Future dividend increases might not be so big or happen so often, but nothing on the horizon threatens the current income stream.
So once again, even though your investment was called out by name, the “news” isn’t really of any use to you.
Apple’s stock price goes down for a while, but your income does not change.
Once in a while, the bad news really is bad.
Most of the time you can safely up ignore it, but sometimes you must deal with it.
For example, let’s look at one of the most widely held income investments in market history.
Let’s visit those millions of investors looking to GE for income.
GE’s decline is finally common knowledge.
It’s also traumatic for people who didn’t do their homework soon enough.
GE’s credit rating is still above junk today, but a far cry from their AAA glory days when people were buying for the reliable income.
What does all the bad news mean for your GE investment today?
Well, hopefully you got out of the common stock a long time ago.
Like back when Immelt promised the dividend was safe, that was a very good time to see it wasn’t safe and get the hell out.
Now, the dividend has been cut to one penny per share and there really isn’t a good path for an income investor stuck in GE stock.
Selling for the tax loss might be the best value left.
But what about the bonds?
GE has a mind-boggling debt load of over $75 billion and paid out over $8 billion in interest expense last year.
That’s a lot of income for the investors.
But is it safe?
Specific assets back some of their bonds while others are just unsecured promises to pay.
Some debt is very short-term and some doesn’t mature for 30 years.
The lead dog always has the best view.
The leftovers go to the next in line.
If you own some GE debt, you have to figure out the quality of your view, roses ahead or the droppings of dogs further up?
The lead dogs among GE investors can probably join the groups from earlier examples and relax, for now.
But roses are not what the dogs further back on the team are smelling, and they have some work to do.
GE is selling assets so they can pay their debts.
They have reduced the common stock dividend to just $0.01 per share, but they don’t generate the income or have cash reserves to pay it.
If GE were “brand X” instead of an American icon, their credit rating would be well into Junk territory already.
For debt holders with unsecured paper, there are plausible scenarios where they get nothing.
This is no time for hope; it’s time for them to salvage whatever cash they can and move on to something offering more reliable income.
In the case of GE, the bad news might really prompt an income investor to sell.
But they’re not selling due to price fluctuations; they are selling because the risk of default has grown too large.
They will sell if they believe their income is threatened and not because of any emotional price moves.
If you invest for income, then you must remain vigilant.
You can’t completely ignore the news, but you can be smart about how much attention you give it.
When market prices are falling, always remember you are an income investor.
Traders lose money with that kind of news, but nothing in your life changed.
A fall in the stock price is of no concern to you as long as your income stream is secure.
In fact, falling market prices might be another buying opportunity for you.
Microsoft looked good at $110 per share.
If it drops to $95 again the yield is even better!