These days, it seems like every investor is chasing that one big thing that will make them rich—the newest stock, technology, fad or whatever.
We contrarian dividend investors know these folks well—you probably have a friend or family member who chased down gains in crypto, NFTs, profitless tech, or heaven knows what else over the last few years.
Heck, they may have even taken a poke or two at you about your “boring” dividend stocks and closed-end funds (CEFs)
Then 2022 came along. And while everything got hit last year, we CEF investors had the last laugh, as we could use our funds’ 7%+ dividends to pay the bills. And we certainly didn’t experience anything like the declines the crypto crowd suffered.
“Fad” Investors Paid a Heavy Price in ’22
You’re probably nodding as you read along. And to be fair, it is easy to be pulled into these types of investments—especially when we see some of the big profits early investors in crypto and meme stocks made. Trouble is when the party ends, it ends quickly—and getting out in time to make a profit is largely a matter of luck.
This is gambling, not investing.
So how do we avoid this trap? Well, the one thing to look for is whether the asset in question has real value. If you seek wealth while ignoring value, you’ll end up falling for a slew of scams and tricks from shady people.
How to Be a RAVEN
In light of that, I suggest ignoring fads and being what I like to call a RAVEN investor. That stands for “rationally assessing value and examining numbers” (okay, maybe it’s not perfect, but it’s a simple way to remember what’s most important). RAVENs stick to logic and reason, relying on numbers and precise methodologies to assess the value of all investment opportunities they see.
In the long term, RAVENs win at the investing game. Not only has study after study shown that consistent, long-term investing in high-quality assets provides reliable returns, but long-term investing also means not losing over 70% of your investment! Losses like those are simply impossible—or at least it’s very hard to do—if you invest like a RAVEN.
And it’s not hard. You just have to follow these four basic rules.
- Have a plan and a goal—and stick to them. What works for one investor doesn’t work for another. Remember what you’re investing for and what you need to get there. Investing isn’t about getting a high score, it’s about getting the freedom to live the life you want.
- Data and facts are kings. A lot of investments feel good. That doesn’t mean they are good. More than anything, investors who rely on facts over feelings beat everyone else. But that also means you need to be open-minded and willing to change your strategy when the data changes. For most people, that’s hard.
- The market’s mood is never right or wrong. Emotions can’t be right or wrong. They can, however, be signals of what is going to happen in the short term, so don’t ignore them, but don’t let them cloud your judgment, either.
- Cash flow creates value—nothing else. If something produces or distributes cash, it always has value. If it doesn’t, it might have value for a short period of time, but, like Beanie Babies, it will ultimately be worthless. Focus on producing cash if you want to gain financial independence.
That last rule trips up a lot of people. Take, for example, Apple (NASDAQ:AAPL), and compare it to Bitcoin. The former produces a lot of cash: $99.8 billion in 2022, which was 5% more than the prior year and over 80% more than before the pandemic.
Bitcoin, on the other hand, doesn’t produce anything. It isn’t supposed to, because it’s a currency, and currencies don’t produce anything. Apple’s near-$100 billion-per-year cash flow is much better than Bitcoin’s $0 for infinity cash flow, so it’s no surprise that Apple has been steadily going up, even after the Bitcoin bubble fully popped.
Steady Long-Term Profits Beat Bubble Timing
And that doesn’t mean just companies’ cash flow. Your cash flow matters, too. If you need a 7% yield on your investments to cover your expenses, you’ll never run out of money if your portfolio yields over 7%. Sticking with low-yielding funds and no-yielding stocks? You have a much higher chance of running out of money.
Fortunately, there are hundreds of CEFs out there that produce such a cash flow and more, while investing in solid companies like Apple.
Take, for instance, one of my long-term favorites, the Liberty All Star Equity Closed Fund (NYSE:USA), a 9.9%-yielding fund that has been a long-time Apple holder, alongside Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Visa (NYSE:V), and Alphabet (NASDAQ:GOOGL). This fund is a good replacement for your low-yielding index fund since its focus on large-cap American firms has been both a source of stability and strong profits for literally decades.
USA’s Strong Long-Term Returns
If you chose USA’s dividend cash flow over Bitcoin’s zero cash flow, you’ve secured an income stream for life. That’s a far sight better than folks who are gambling in speculative and manipulated markets like crypto. The result for them will likely be the opposite of financial independence.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."