Market timing doesn’t work, but adding cash for rainy days does. Using the Dividend Aristocrats as a cash alternative.
Last week’s Jackson Hole Economic Symposium went over without spooking markets. Unsurprisingly, we weren’t the only ones wondering if markets read things right. For now, we’ve avoided a repeat of the 2013 “taper tantrum.” But one thing is clear: the Fed’s breakneck rate of asset purchases cannot go on forever.
With the COVID-19 Delta variant surge putting a damper on post-Labor Day returns to the office, we expect similar hiccups heading into the second half of 2021. Investors are increasingly wise to start playing defense.
Granted, cash isn’t the most flashy asset class. But its powerful benefits are some of investing’s most under-appreciated qualities.
Institutional investors have long appreciated the overwhelming investment benefits of holding excess cash, especially at times of unexpected opportunity. By adding cash or cash alternatives early, savvy investors can better deploy their dry powder and seize opportunities on advantageous terms.
“From the time we started our investment counsel operation 44 years ago, we published as the motto of our business: buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest reward.”
Historically, everyday investors have confused cash allocations with “emergency funds”— responsibly setting aside a healthy cash buffer for liquidity needs. After nearly a decade of perpetually low interest rates, investors have—to their detriment—moved away from classic cash alternatives. But a range of new investment alternatives is now available to replace weak CD-rates and money market funds.
Cash Is King
Rather than selling off into what is still a rather bullish market, or adding directly to ultra-low yielding cash allocations. Short-term, structured notes linked to stable and cash-rich businesses may generate added yield while positioning a portfolio to take advantage of opportunities that arise during the next dip.
Uncertainty leaves investors looking for stability; the Dividend Aristocrats have a proven track record of delivering across all market cycles. As a true all-weather investment, this group of companies has been growing its dividend per share for a minimum of 25 consecutive years.
As a group, the Dividend Aristocrats may not be as exciting as other investments, but research consistently shows that dividends represent a significant portion of S&P 500 total return—perhaps as high as 50% or more.
For example, indicative pricing as of 9/1/2021 shows that a 6 month noncallable guaranteed structured note with a 9 month maturity with Albemarle, ExxonMobil, and Caterpillar as the referenced underlying asset yields 6.14%. This includes 50% soft principal protection.
While not appropriate for every investor, and likely to be called at 6 months, this hypothetical note would present interesting opportunities for investors to enhance short-term yield while tapping into the durable business models and proven cash flow-generating capabilities of blue chip companies.
Similar strategies allow savvy investors to establish a short term position with an above average yield. A structured note can further enhance this by establishing a respectable level of downside cushion.
The bull market doesn’t look to be running out of gas, but it might be time to play a little defense. A short-term Dividend Aristocrat structured note makes a compelling alternative to cash as a play to generate added yield while stockpiling dry powder for rougher days ahead.
Ready to move away from one-size-fits all investment options? Our team of investment specialists can help you personalize your clients’ portfolios with solutions linked to unique client risk-reward preferences.
Ready to get started? Sign up for the platform
Important Information & Qualifications
An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material does not provide individually tailored investment advice, nor does it offer tax, regulatory, accounting or legal advice.
Hypothetical performance results have inherent limitations. There are frequently sharp differences between hypothetical and actual performance results subsequently achieved by any particular trading strategy. Hypothetical performance results do not represent actual trading and are generally designed with the benefit of hindsight. They cannot account for all factors associated with risk, including the impact of financial risk in actual trading or the ability to
withstand losses or to adhere to a particular trading strategy in the face of trading losses. There are numerous other factors related to the markets in general or to the implementation of any specific trading strategy that cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Any estimates and projections (including in tabular form) given in this communication are intended to be forward-looking statements. This should be used for informational purposes only.
Securities offered through Halo Securities LLC, a SEC Registered Broker/Dealer and member of FINRA/SIPC. Halo Securities LLC is affiliated with Halo Investing, Halo Investing is not a broker dealer. Halo Securities LLC acts solely as distributor/selling agent and is not the issuer or guarantor of any structured note products.
Each relevant issuer has separately filed a registration statement (including a prospectus), and will file a pricing supplement with the SEC for any offering to which this communication relates. Before you invest in any offering, you should read the prospectus in that registration statement, the applicable pricing supplement and other documents such issuer has filed with the SEC for more complete information about that issuer and that offering. You may get these documents free of charge by visiting EDGAR on the SEC website at www.sec.gov.