Aug 24

Are there any safe investments today? 4

Let’s do some easy math to illustrate the hazards of a long position. At 2.7% (the average of the S & P 500 dividend yields), it will take almost 37 years to ‘break even’, at a zero percent tax rate, if you never sell. You must understand this number (almost 4 decades!) to be the realistic time of investment.

If you are not going to be alive for 40 more years, then you should reconsider this investment strategy. If you never sell, you have to wait 50 to 75 years for your break even period, when accounting for taxes on those dividends.

Certain companies in their respective industries are relatively certain income generators that pay dividends. They are also large enough that if the company mis-steps, fraud and accounting issues aside, you can always sell before being ‘wiped out’.

Technology companies like IBM, HP, and Oracle; certain energy companies like Exxon or British Petroleum; certain retailers like Federated Department stores; should all be considered safe investments. They have sufficient internal and external controls where the chance of a huge fraud that wipes out shareholders instantaneously is extremely unlikely.

The caveat for equities investing is that you absolutely need to follow that company in the news and look at the required quarterly SEC filings. You must sell when you and/or others feel the company is running an unsustainable path (i.e. headed towards bankruptcy). This is the only way to ensure a significant sale price such that, when accounting for dividends and taxes, you net positive income from the sale.

Leave a Reply