Second entry in our series: Recession-proof Investing.
Last week, we saw the basic concept of recession- its causes and consequences, and even illustrated three takeaways. Let’s address how our business model helps our Philanthroinvestors® (PIs) get through recession and discover cash flow in times when it is scarce.
This week we will go past generalities and focus on our first comparison with another model: dividend stocks . What are dividend stocks? The Merriam-Webster Dictionary defines this term as:
“The payment by a corporation of a dividend in the form of shares usually of its own stock without change in par value”
So, it is the payment received by an ordinary person who owns shares in a company that pays dividends. Or it could be the owner of a company who, being able to structure his payment to be through salary or profits, chooses dividends as an option. Times vary according to the company: monthly, quarterly, every quarter, annual, etc.
Dividend stocks are not provided exclusively through shares in the stock market, but also through models such as REITS (Real Estate Investment Trusts) and others. Next week we will do a comparison between REITS and ourselves, but in this newsletter we will focus on the stock market to keep things simple.
And what happens if we reinvest our profits by buying more shares in the company that is paying them? Correct! The next time we will receive a larger payment, which, if reinvested, will end up generating a snowball effect. It sounds like the ideal investment, doesn’t it?
Perhaps we should be careful not to buy what Thomas Brock of Investopedia.com calls “fool’s gold:”
“While high dividends have natural appeal, investors should be careful they are not buying fool’s gold. An investor should ask, why is the dividend yield so high? In some cases, a high dividend yield can indicate a company in distress. The yield is high because the company’s shares have fallen in response to financial troubles. And the high yield may not last for much longer. A company under financial stress could reduce or scrap its dividend in an effort to conserve cash. This in turn could send the company’s share price even lower.”
Did you pay attention to the sentence in bold print in the quote? “A company under financial stress could reduce or scrap its dividend in an effort to conserve cash” means that any company that pays dividends can decide to stop doing so at any time. They can give notice overnight without legal repercussions, since everything is subject to decisions of its board of directors and nothing more.
In fact, here is a list of companies that recently suspended such payments:
Also, when dividends are not paid, the investor’s shares historically tend to depreciate. When the company starts paying dividends again, the cashflow will also be lowered.
We are talking about a model that has multiple attractive aspects, but it can be suspended indefinitely due to a decision that you, the investor, has no control over. This is a risk that should not be overlooked when using this model as a vehicle to get through this recession, since the investment will not be protected.
By comparison, the Equity & Help model offers the attractive aspects of dividends: cashflow, recurring income, a great return on investment, reinvesting at your own pace, a good backbone for estate planning, and recession protection.
Each PI has the opportunity to buy more houses using only the income produced by his investment, while still owning them. And don’t neglect the fact that the houses also generate cash flow, which as we mentioned last week, is a resource scarce in times of recession and that makes our program a hot commodity.
Since the PI houses were purchased at their lowest price, you will not be facing a depreciation of your investment. On top of all this, you can also choose to buy a warranty for each of your properties in a single payment at a low cost. This means that your investment will be protected if anything goes south. There is no protection like this in the stock market or dividend-paying stock.
As a PI, you are not dependent on the financial situation of Equity & Help and you are given a detailed report every month about the performance of your assets. You are free to liquidate productive properties, sell vacant ones or simply end your relationship with us and turn your homes over to another company for management, or manage the properties yourself.
Many of our PhilanthroInvestors® also like the fact that they are not purchasing the stock of a company with nothing but the hope that everything goes well and with their only reward being the money generated by dividends. With Equity & Help PhilanthroInvestors® get the satisfaction and fulfillment of helping families through hard times, allowing them to recover the American dream of owning their own home and that stabilizes neighborhoods in the U.S.
So, which way sounds Recession-proof to you?
See you next week!