I have worked as a financial advisor, writer and following the markets for nearly 25 years. One of my favorite investments are dividend stocks. Whether you As bond yields drop, many Canadian pension plans are looking at new strategies to increase returns through alternative investments, according to a webinar hosted by the Portfolio Management Association of Canada on Tuesday. “We’re looking for uncorrelated scalable risk, with low or no correlation to major markets like equity or credit,” said Jane Segal, portfolio … Western Asset’s Head of Product Management, Doug Hulsey, joins our Head of Equities, Stephen Dover, to discuss fixed income investing today. The difficulties for those in the younger generations to generate wealth are consequences of a structural shift in the U.S. economy in the last forty years, we
I have worked as a financial advisor, writer and following the markets for nearly 25 years. One of my favorite investments are dividend stocks. Whether you are a retired or starting your career, dividend growth stocks are a great thing to add to your investment portfolio.
A dividend growth stock attempts to increase its payout in the future. Many people like choose to invest in dividend growth stocks because they are looking to add some income to their portfolio that will grow over time. This is opposed to the dividend stocks that pay a flat payout.
So what is a dividend stock? The short answer is that a dividend stock is a share/stock that receives a small payment from the company they own. People often use the term “dividend stock” loosely because it can also be an exchange-traded fund (ETF) or real estate investment trust (REIT). Payments to the stock owners are typically paid quarterly but can be paid monthly, semi-annually, or annually. The amount varies from company to company and can be reduced or increased based on the board of directors for a company.
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Looking for dividend stocks can be very challenging. Typically your need to search for companies that have projected growth of at least 5% expected growth, low debt ratios, in a growing market and robust cash flow. This should be your basic search. You must now start to analyze the companies closer and determine if it makes sense for you to buy them.
In order to help you get started, we have provided a list of 21 dividend stocks for investors to research.
There are many reasons why to invests in dividend stocks, and it will vary from investors. Personally, I like seeing the dividends hit my account, especially when the market or portfolio is down. Here are my top 5 reasons to invest in dividend income stocks:
The first reason to love dividend investing is, of course, for the passive income that it creates. Now, I know passive income can be a tossed out word there, especially in today’s age with reality TV, YouTube, and people making shows about passive income.
But it truly is, in some form, a passive way to earn income. Because if you invest in companies and they are paying you money every single quarter or however often that they pay, that is money that you’ve earned for pretty much doing almost nothing.
There is considerable research that you have to do beforehand investing in dividend income stocks, but that is true of all investments. If done right, you’re making money by just having your money sitting in an account and having ownership of these different companies.
So this is an outstanding feature for a lot of people because if you can have money-generating for you every single quarter without having to do a lot of work. Honestly, that is one of my favorite things when it comes to it.
Not that I’m lazy. Not that I don’t want to work, but I also like having money working for me that I don’t have to put a lot of time and effort into Once I’ve set everything in motion.
Of course, this also means that when you are creating passive income, depending on when you do it, it can be a significant amount if you are focusing it over time how much you have in your account.
Now, one of the significant downsides when it comes to creating passive income with dividend investing is that it typically means a lot more capital to be able to generate a tremendous considerable amount of passive income.
If you are doing this over time, it won’t be a big deal. But if you are looking to generate that 3 to 4% income and need thousands of dollars every single month, you’re going to have to be putting in quite a bit of money to help generate that money coming in.
So for most people, it’s beneficial if you’re getting started early to help you build up your portfolio.
So your dividend income is just getting reinvested, which we’ll be talking about here in a second, as well as being able to one day in the future have money coming in enough to the point where it can pay your bills and take care of your financial needs.
So the next reason to love dividend investing is that typically it is a little bit less risky than other stocks. Now, this might sound weird because, of course, any investment that you’re doing is always going to be a risk.
But risk management is a huge factor when it comes to a lot of people and how they’re able to put their money into the stock market.
If you are putting your money into a lot of growth stock, that is going to have a higher potential for risk. That means there is going to be a lot more ups and downs, which can be a good and bad thing.
When it comes to dividend stocks, if you’re doing your right research, you’re typically going to be putting your money into what they call blue-chip stocks, which are mostly those more prominent companies like Walmart or McDonald’s.
These are companies that have been around for a long time and have been producing an excellent yield when it comes to their dividend.
Now, this last risk is because these companies are already massive, and they want to mitigate a lot of their own risk. So the companies typically pay back a higher yield on their dividend so that way, you can hold on to their stock even longer.
You want to be invested in because you have a higher history of knowing that they are paying on their dividends every single quarter or how often they pay.
Now we that doesn’t mean that there is no risk whatsoever, especially when we have downturns and markets. Of course, all stocks typically will be going down during those periods. So even if you’re invested in blue-chip stocks that have that doesn’t mean there is no risk whatsoever.
So always be paying attention to that aspect of it. But typically, if you are investing in blue-chip stocks or companies that have excellent histories when it comes to paying out dividends, you’re going to have usually less risk and have less volatility.
So the next reason to love dividend investing is that you can reinvest your dividends back into the companies that paid out those dividends. And this is probably one of my favorite things.
It is a great feeling to get paid out dividends and then reinvest those back into the companies to have more ownership because the more ownership you have of those companies, the more dividends are going to get paid out in the future.
So it is compounding, and the power that it actually will give you is essentially more purchasing power to have more ownership to have more dividends to get paid out for the future.
And it’s excellent, especially if you are at a younger age where you can compound all of those dividends over and over, and it continues to grow.
It can mean high payouts in the future. So that way, when you are retired or don’t want to work anymore, you can have that money coming in from dividends to be able to pay you at a much more considerable amount than if you just kept those dividends early on.
So reinvesting those dividends is a beautiful thing.
And it is so great to see the effects of actually putting your money back into the companies that already paid you out those dividends.
So next up on this list is going to be for tax benefits. Now, I am not a tax expert. So make sure you always get additional information from a tax expert on this information.
Still, when it comes to taxes on it, your dividends, you’re going to be typically taxed quite a bit less than you are with your regular income.
If, in the future, your goal is to have $2,000 every single month paid out in dividends. You’re going to be taxed less on that $2,000 than if you worked for somebody else or a company. Now, if you worked for a company and got paid out that $2,000 on a regular salary, you’re going to get taxed at a much higher rate.
There are some significant tax benefits of having ownership in dividends and getting paid out those and keeping it for yourself versus actually working for somebody else.
It is a pretty considerable difference anywhere from 10 to 25% difference in taxes that you will get charged for having dividends as your form of income.
And it’s a cool thing, and it’s something you want to look into and make sure you have all the right information so you can be adequately understanding of the tax codes because of course, it’s always crazy and wonky all over the place.
Now before we go on to the next one, make sure that you let me know in the comments down below.
So the next reason why I love dividend investing is because of the dividend yield increase. Now, to break this down, I’m going to kind of go into a little bit of an example here to make things a little bit easier.
But the thing about dividend increases is that this means that you are making more money for doing absolutely nothing.
This can help you keep up with inflation. Because if inflation is going anywhere from two to 4%, you want to make sure that your money is potentially grow with you.
Otherwise, you are going to be losing purchasing power over time.
A lot of companies will try to increase their dividend payouts every single year. They want the dividend yield to stay consistent with their stock price.
If a companies’ stock price goes crazy high, its dividend yield will go down significantly.
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HOOPP bolstering bonds with alternative investments
As bond yields drop, many Canadian pension plans are looking at new strategies to increase returns through alternative investments, according to a webinar hosted by the Portfolio Management Association of Canada on Tuesday.
“We’re looking for uncorrelated scalable risk, with low or no correlation to major markets like equity or credit,” said Jane Segal, portfolio manager at the Healthcare of Ontario Pension Plan. “We’re looking to use these strategies to diversify our return streams at the fund and if we have a high beta-to-equities market, we’re likely doubling down on exposure that already exists elsewhere at the fund.”
For the HOOPP, the use of alternatives isn’t considered a substitute for the bond portion of its portfolio approach. Segal said the fund expects to see a meaningful allocation to alternatives within the next three to five years, with a current focus on market mutual strategies.
Read: Pension plans turning to alternatives for steady returns amid ultra-low bond yields
As well, while the HOOPP aims to reduce its overall volatility, it encourages individually volatile components, as they can help with increased returns.
“You can definitely have a strategy that has a low correlation to markets but has a high volatility,” said Segal. “Commodity markets tend to be uncorrelated to traditional markets while being fairly volatile. Low correlation and low volatility are very different things and with volatility, we look at it in a number of ways — one is performance in normal market conditions versus a stressed market scenario and the more of these scenarios we have, the better equipped we are.”
Also speaking during the webinar, Paul Sabourin, chairman and chief investment officer at Polar Asset Management Partners, referred to other approaches pension funds can explore. One option is convertible arbitrage, which involves the purchase of the convertible debenture issued by a publicly traded company and the simultaneous shorting of the underlying stock.
Read: Canadian pensions have healthy liquidity despite alternative investments: report
“What we’re trying to harness there, by being long on the convertible debenture and short on the underlying stock, is to isolate the coupon that gets paid and reduce the risk in the portfolio. The convertible debenture should move up and down in some sort of correlation to the underlying stock.”
Another strategy involves investing in a special purpose acquisition company, otherwise known as a shell corporation, which can then take a private company into the public market without going through an initial public offering, said Sabourin, noting the strategy provides some key advantages for investors.
“When we give the [special purpose acquisition company] money, they put the money in treasury bills waiting for them to buy a company. It’s a relatively low-risk opportunity, so if they buy a company that we like and the stock goes up, we can sell the stock. If they buy a company we don’t like, we can take our money back through the treasury bills.”
Read: Why pension plans are investing in alternatives
David Picton, president and portfolio manager of Canadian equity strategies at Picton Mahoney Asset Management, said regardless of the approach, diversification remains key.
“What we’re trying to do is take this simple efficient frontier, the maximum return per unit of risk in stock and bond portfolios, for your particular risk tolerance and try and boost the return per unit of risk for that same risk tolerance by adding in these other things.
“The only way that works is if they have a positive return benefit and they’re uncorrelated. That’s where the real benefit of alternatives fits in.”
Author: Blake Wolfe | November 18, 2020
Why Fixed Income Now | Franklin Templeton
With yields near zero, many investors may question the value of fixed income within a portfolio. Western Asset’s Head of Product Management, Doug Hulsey, joins our Head of Equities, Stephen Dover, to discuss fixed income investing with an active-management lens. He makes a case for the asset class for investors in light of market uncertainties and outlines where he sees opportunities today.
Stephen Dover: Welcome, Doug.
Doug Hulsey: Thank you, Stephen.
Stephen Dover: So Doug, let’s just start off looking at the fixed income landscape and how your views on the elections have made you think differently?
Doug Hulsey: Leading up to the election, Western did a number of scenarios using different election outcomes, divided government, one government with all blue or all red. But what appears to have transpired is probably the best scenario for the fixed income markets, and that is divided government. It would appear as though the Republicans will retain the Senate and the presidency will be assumed by President-elect Biden, of course, the House remaining with the Democrats. So, against that scenario, I’m looking at the impacts on the fixed income markets. This is a pretty good outcome from a market predictability standpoint.
Stephen Dover: In the short term, the question everybody asks about is the stimulus. So how does what’s happening or not happening on the stimulus affect your thinking around fixed income?
Doug Hulsey: Yeah, it’s very important. Obviously, the stimulus programs early on in the COVID pandemic were actually very beneficial to the markets. If you look at the corporate credit facility that the Fed [US Federal Reserve] announced early on in COVID, which was highly supportive to the credit markets, after credit spreads have widened out quite considerably, that was a very promising and supportive sign to the credit market, and certainly provided some stability to that market that had otherwise experienced a lot of instability and credit spreads widening.
Stephen Dover: Of course, election results are very important, but for us in the investment markets, the reserve banks are incredibly important, perhaps even more important. How do you see the Federal Reserve’s role based on the election, or what do you see going forward with the Federal Reserve?
Doug Hulsey: When you think about the Fed, Chairman Powell came out and said that they’re willing to be highly accommodative for an extended period of time, even inferring that they would be willing to be accommodative even if inflation were to tick up. As bond managers, we’re concerned about rising interest rates because that erodes the principal value of fixed income investments. But when you have a Fed come out and say, it’s going to be highly supportive of a market, lower for longer, that provides a lot of stability to the fixed income markets and some predictability. The announcements by the Fed have been incredibly supportive. They’ve obviously really stabilized the markets. You’ve seen the tremendous rally in equities over the last few months as the economy has continued to recover. And, actually we’ve seen bonds, bond yields back up since they touched a low of 99 basis points1 in early March. Today we’re around 1.62% on a 30-year [US Treasury] bond. So, they have backed up somewhat, but still historically low, but the Fed has been incredibly supportive and certainly adds some element of predictability with managing bond portfolios.
Stephen Dover: Those low rates have been very positive for the equity markets as well, which also discount future income streams, very similar to fixed income. The big debate that people seem to have is about inflation. Of course, many classical economists have predicted inflation for a long time now, and we haven’t seen it. What’s Western’s view on inflation over the next year or two?
Doug Hulsey: If you think about the last almost 40 years, interest rates have been in a massive decline. And certainly, as I mentioned earlier, the 30-year rate hit 99 basis points, a historical low, in March of this year. So, in terms of inflation, we haven’t seen evidence of inflation certainly here in the States, and we think that’s going to remain the case. Obviously, inflation is a negative event for the bond markets, but we see a Fed being incredibly supportive. Certainly, we haven’t seen any signs of any material uptick in inflation, again, which is very supportive for fixed income markets.
Stephen Dover: So, turning to the other good news we’ve had in the last couple of weeks, and that’s the vaccine coming out, may come out as soon as the end of the year. How does that affect your outlook? And maybe just tied to that, how, and when, might you see an economic recovery coming?
Doug Hulsey: I’m going to address that, but if you think about the day after the election and it became somewhat apparent that we were going to have divided government, if you examine what the capital markets generated since then, oil prices are up almost 6%. The S&P [500 Index] is up 5%; the Dow [Jones Industrial Average] is up almost 8%; the Russell 200 [Index] is up 10%, EAFEA [Index] is even up 8% and we’ve had a minor back-up in bond yields.2 So, kind of the divided government aspect has been very supportive for the financial markets. Obviously, the COVID vaccine announcements have also been highly supportive. So, you start to see kind of blue patches in the sky here. And you’ve seen capital markets respond positively. You’ve seen a minor back-up in bond yields, you’ve seen credit spreads tighten. So, the announcement of these vaccines has been tremendously supportive of the capital markets. The bond market certainly has taken it positively, and the bond market is pretty good at predicting what’s going to happen to the economy several months out. And I think the bond market likes what it sees right now.
Stephen Dover: We talked a lot about the United States, but of course, if we look globally, it’s really interesting. I still have a hard time getting my head around the fact that virtually 25% of global debt is actually negative yielding. So how do you look at global bonds? I know that’s a small part of the Barclay’s Aggregate Bond Index, but you are a global investor.
Doug Hulsey: If you look at negative-yielding debt on a global basis, a lot of Europe has negative yield, certainly. You’ve had central-bank intervention there in terms of supporting those markets and buying those securities. Negative yields are a bit counterintuitive. When you think about it, generally you think about positive yields that entities have to pay to borrow, and issue debt. So, to invest in securities with negative-yielding securities—it’s a bit counterintuitive. We still think the United States offers one of the most attractive yield curves. Admittedly, when you think about the yields across the US Treasury curve, they are very low still at this point, but on a relative-value basis in a world that’s starving for yield, we still like a lot of the US Treasury, or US fixed income market relative to other global markets. We do see Asia improving, so, we have a bit of a favorable view there. Europe is still kind of coming out of its COVID-related impact on the economy. So, we’re not as positive there, but certainly, we still have a very favorable view.
Stephen Dover: Doug, the question that we’re always asked is how do you think about fixed income in a zero interest-rate environment?
Doug Hulsey: When you think about low interest rates and relatively tight corporate spreads, those are two of the main ingredients that go into valuing the liabilities of corporate pension plans. And certainly, with these extremely low interest rates, it’s caused valuations again, to go materially up. That presents a lot of issues for these corporate chief investment officers trying to manage against the liabilities with interest rates being so low. They need a highly compensated capital markets through equity returns or their other investments to keep up with their liabilities. And it’s been a race that they’ve struggled with, certainly for the last 20, 25 years; the corporate pension pie community is going through a couple of brief moments in time where they were actually close to fully funded status, and they failed to capitalize on de-risking their asset allocation mix relative to their liabilities so that they could maintain a fully funded status.
I know it’s a frustrating game for those chief investment officers out there because the liabilities have been a very difficult race to win for them. And, if you kind of think about the year 2000, pension plans were materially overfunded at that point, but the concept of liability- driven investing or LDI really hadn’t taken hold at that point because interest rates were still pretty high, and certainly high relative to where they are today, and corporate pension plans didn’t really structure their assets toward their liabilities at that point because they had pension plans that were materially overfunded and interest rates that were high, which kept valuations low. But for the last 20 years or so, they’ve been battling an interest-rate environment where rates have been heading lower, corporate spreads remained relatively tight, and capital markets have been not accommodative enough to offset the increase in my abilities that they’ve experienced due to the drop in interest rates. So, it’s been a really tough game for those corporate pension plan sponsors. I feel for them.
Stephen Dover: So, maybe I’ll ask you the same question around individuals. Certainly, most individuals don’t think in terms of liability driven investing, but where does fixed income fit into the individual’s portfolio now with zero interest rates?
Doug Hulsey: Good question, Stephen. And, you know, at the start of the year—let’s just use the 30-year Treasury as an example. At the start of the year, I think the 30-year Treasury hit a high point of around 2.36%, and we had a lot of our investors and even on the retail side, say, “boy, that is really unattractive, I don’t want to invest in that.” But if you fast forward 60 days later, and again, this was at the early stage of COVID, as I mentioned earlier, the 30-year Treasury touched 0.99%. But what people don’t realize is, that represented a 32% return on that Treasury during that compressed timeframe. And you say, “well, why is that the case?” Well, the duration on a 30-year Treasury at this point is about 24, 25 years.3 That’s a lot of duration. That particular security exhibits a lot of sensitivity to changes in interest rates. The point of me telling you this is that the yield doesn’t always give you the best indication of the return potential of that security. And keep in mind, the Barclays Agg [Aggregate Index] continues to exhibit a very low correlation profile relative to traditional risk assets like equities and private equity and hedge funds and so forth. And this COVID example was a stark reminder that you need diversifying assets in your portfolio. And one other thing to keep in mind, when you think about the last 10 years, the Barclays Aggregate has returned 87% total return. Of that 87%, 80% has been generated through the income component of those fixed income securities. So, the price appreciation associated with fixed income for the last 10 years has been fairly negligible. Fixed income continues to generate a reliable source of income for investors and in a world starved for income sources. There again, there is no better solution than fixed income. And if you look at the volatility that you are experiencing in fixed income, it’s roughly 25% of the volatility that you get in the equity market. So, while equities are certainly an integral part of any reasonable asset allocation mix, fixed income has, and always will be, a part of any diversified portfolio. And certainly, in terms of generating income, the Barclays Aggregate will continue to do that.
Stephen Dover: I think what maybe is interesting, at least to me from the equity point of view, is all investments, including equity, are really a discount of future income streams. Maybe what a lot of investors don’t know is if you look over the past 40 years, 40% of the S&P 500 return actually came from dividends. And even looking at this last decade, 17% of return came from dividends. So, income is important in the equity markets as well. So, the other question we get is a lot of investors are trying to figure out what to do with cash. What is your thought now about people in cash, or how they should look at that from a fixed income perspective?
Doug Hulsey: You know, cash is yielding close to zero now. Certainly, if you needed to make some immediate payments for a purpose, you need some investments parked in cash, but when you think about the economic construct and certainly the supportive comments from the Fed, that is great news for the fixed income markets. And certainly, you want to think about, as investors, considering going out the [yield] curve, if you will, considering spread product to add incremental yield in your portfolio. And, you’ve got to think about your longer-term return objectives.
Stephen Dover: Thank you very much, Doug, for being here.
Doug Hulsey: Thank you.
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Australia: Issued by Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services License Holder No. 225328), Level 19, 101 Collins Street, Melbourne, Victoria, 3000. Austria/Germany: Issued by Franklin Templeton Investment Services GmbH, Frankfurt, Mainzer Landstr. 16, 60325 Frankfurt/Main, Tel. 08 00/0 73 80 01 (Germany), 08 00/29 59 11 (Austria), Fax: +49(0)69/2 72 23-120, [email protected], [email protected] Canada: Issued by Franklin Templeton Investments Corp., 200 King Street West, Suite 1500 Toronto, ON, M5H3T4, Fax:(416) 364-1163, (800) 387-0830, www.franklintempleton.ca. Netherlands: Franklin Templeton International Services S.à r.l., Dutch Branch , World Trade Center Amsterdam, H-Toren, 5e verdieping, Zuidplein 36, 1077 XV Amsterdam, Netherlands. Tel +31 (0) 20 575 2890. United Arab Emirates: Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority. Dubai office: Franklin Templeton, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box 506613, Dubai, U.A.E., Tel.: +9714-4284100 Fax:+9714-4284140. France: Issued by Franklin Templeton International Services S.à r.l., French branch, 20 rue de la Paix, 75002 Paris France. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited, 17/F, Chater House, 8 Connaught Road Central, Hong Kong. Italy: Issued by Franklin Templeton International Services S.à.r.l. – Italian Branch, Corso Italia, 1 – Milan, 20122, Italy. Japan: Issued by Franklin Templeton Investments Japan Limited. Korea: Issued by Franklin Templeton Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12 Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-968. Luxembourg/Benelux: Issued by Franklin Templeton International Services S.à r.l. – Supervised by the Commission de Surveillance du Secteur Financier – 8A, rue Albert Borschette, L-1246 Luxembourg – Tel:+352-46 66 67-1 – Fax:+352-46 66 76. Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Poland: Issued by Templeton Asset Management (Poland) TFI S.A.; Rondo ONZ 1; 00-124 Warsaw Romania: FTIML Branch Bucharest, 78-80 Buzesti Street, Premium Point, 7th-8th Floor, 011017 Bucharest 1, Romania. Registered with the Romania Financial Supervisory Authority under no. PJM01SFIM/400005/14.09.2009, and authorized and regulated in the UK by the Financial Conduct Authority.Tel +40 21 200 96 00, Fax +40 21 200 96 30 Singapore: Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E. 7 Temasek Boulevard, #38-03 Suntec Tower One, 038987, Singapore. Spain: Issued by Franklin Templeton International Services S.à r.l. – Spanish Branch , Professional of the Financial Sector under the Supervision of CNMV, José Ortega y Gasset 29, Madrid, Spain. Tel +34 91 426 3600, Fax +34 91 577 1857. South Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which is an authorised Financial Services Provider. Tel:+27 (21) 831 7400 ,Fax:+27 (21) 831 7422. Switzerland: Issued by Franklin Templeton Switzerland Ltd, Stockerstrasse 38, CH-8002 Zurich. UK: Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London EC4N 6HLTel +44 (0)20 7073 8500. Authorized and regulated in the United Kingdom by the Financial Conduct Authority. Nordic regions: Issued by Franklin Templeton International Services S.à r.l. , Contact details: Franklin Templeton International Services S.à r.l., Swedish Branch, filial, Nybrokajen 5, SE-111 48, Stockholm, Sweden. Tel +46 (0)8 545 012 30, [email protected], authorised in the Luxembourg by the Commission de Surveillance du Secteur Financier to conduct certain financial activities in Denmark, in Sweden, in Norway, in Iceland and in Finland. Franklin Templeton International Services S.à r.l., Swedish Branch, filial conducts activities under supervision of Finansinspektionen in Sweden. Offshore Americas: In the U.S., this publication is made available only to financial intermediaries by Templeton/Franklin Investment Services, 100 Fountain Parkway, St. Petersburg, Florida 33716. Tel:(800) 239-3894 (USA Toll-Free),(877) 389-0076 (Canada Toll-Free), and Fax: (727) 299-8736. Investments are not FDIC insured; may lose value; and are not bank guaranteed. Distribution outside the U.S. may be made by Templeton Global Advisors Limited or other sub-distributors, intermediaries, dealers or professional investors that have been engaged by Templeton Global Advisors Limited to distribute shares of Franklin Templeton funds in certain jurisdictions. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so.
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Income Inequality Continues to Expand
The difficulties for those in the younger generations to generate wealth are consequences of a structural shift in the U.S. economy in the last forty years, well before today’s late Boomer and Gen X parents entered the labor market as twenty-somethings. As highlighted in a recent Federal Reserve Bank research paper, “Market Power, Inequality, and Financial Instability”, Isabel Cairo & Jae Sim:
A few secular trends have emerged in the U.S. economy over the last four decades…First, a real wage growth has stagnated behind productivity growth over the last four decades and, as a result, the labor income share has steadily declined…
To translate, wages for the majority of those in the labor market have not increased concomitantly with the growth in productivity (the ability to create goods and deliver services more efficiently) over the last forty years. Thus, while corporations have increased profits with productivity gains, the financial spoils of such gains have not been widely distributed amongst average employees.
…the before-tax profit share of U.S. corporations has shown a dramatic increase in the last few decades…
However, wages for the majority of employees are decreasing, and have been declining for decades:
which may explain the growth in wealth for the top 5% of all Americans.
…income inequality has been exacerbated over the last four decades…
widening the gap between the economic haves and have nots:
Fourth, wealth inequality has also been exacerbated during the last four decades…
Net worth has declined since the Great Financial Crisis of 2008 for every generation 65 years and younger.
The wealth declines are explainable as workers earn less, and expenses, like college tuition and childcare are rising. So, families are spending more of their decreasing wages to nurture their children, saving or investing less:
As expenses are greater than income, yet more families are seeking to maintain their lifestyle as well as provide their children the greatest chance for economic prosperity, then
…the rising household sector leverage has been coupled with rising financial instability
In the growing wealth gap between the haves and have nots, also demarcated along generational lines, the young are increasingly willing to air their frustrations publicly, no matter their politic. Their angst, translated into political mantra, may confuse the electorate, and obfuscate what is instead a generational conflict, that if unresolved could further decay our social fabric and result in dramatic change in the status quo.
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Tagged Bloomberg News, Charles Hugh Smith, College admissions, Employment, Federal Reserve Bank, Financial Times, Generation Z, Middle Class, The Golden Ticket, The Great Financial Crisis, Underemployment, Wealth
Author: About Jill Yoshikawa, Ed M, Partner of Creative Marbles Consultancy