It’s often tempting to chase highflying stocks. But they can be vulnerable to sharp drops when the stock market swoons. If you’re worried about a possible market pullback or economic recession, parking money in a solid exchange-traded fund may help you sleep better. (An ETF is a fund that trades like a stock.) One way to take on less risk – while still expecting respectable returns over the long term – might be the Vanguard Morningstar Value ETF (NYSE: VTV).
This ETF tracks the CRSP US Large Cap Value Index, which assesses factors such as price-to-book and price-to-sales ratios to determine which stocks seem undervalued. Vanguard is known for low fees, and this ETF’s tiny expense ratio (annual fee) of 0.03% means you’ll pay just $3 annually for every $10,000 you have invested in it.
Over the past five and 10 years, this ETF has averaged annual gains of around 12.5%. It’s also a respectable dividend payer, recently sporting a dividend yield of 1.9%. The fund’s “beta” of 0.69, meanwhile, reflects low volatility: If the overall market dropped by 10%, this fund might drop by only 6.9%.
The ETF holds more than 300 stocks, including Micron Technology, JPMorgan Chase, Johnson & Johnson, ExxonMobil and Walmart. (The Motley Fool owns shares of and recommends the Vanguard Morningstar Value ETF.)
My smartest investment
I read in your newspaper feature about someone who started investing early and retired a millionaire. I did the same thing, socking money away for more than 40 years. It was a bit rough in the early years, but it was worth it. My nest egg is now in the seven figures, and I can buy, do or go to anything. Fortunately, I already did all that I wanted through my profession. I have no urge to explore the world now or to buy expensive things I don’t really need. My daughter has just entered the workforce. Next year, I’ll show her what I did, so she can decide what path she wants to follow for the next 40-plus years. – C.C., via email
The Fool responds: Many of us don’t have 40 years of investing left, but quite a few of us do. Even those in their 40s could live another 40 or 50 (or more) years, keeping some portion of their long-term money in stocks. If we can get young people we care about started in investing in their 20s or 30s, we can really set them up for a comfortable future. And it can all be as simple as regularly adding money to one or more low-fee, broad-market index funds, such as an S&P 500 index fund, for decades.
(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@ fool.com.)
Ask the fool
Q. Do companies ever reduce their dividends? – D.B., Henderson, Nevada
A. They sure do – but they try very hard not to, because a dividend cut is a sign that they’re struggling financially. A cut will disappoint shareholders and may also end a long streak of annual increases. Before reducing, suspending or even eliminating their dividend, companies will generally seek other ways to cut costs or boost revenue.
One company that recently cut its dividend is the food giant Conagra (home to brands such as Birds Eye, Slim Jim and Marie Callender’s). In mid-July, it slashed its payout by 50%. Conagra is carrying a lot of debt, and growth has been elusive.
More recently, Canadian telecommunications company Telus cut its dividend by about 55%, in part to help pay down its debt. The company, under a new CEO, is looking to transform its operations.
A dividend reduction is certainly a red flag for investors, but it’s not necessarily a deal-breaker. Plenty of successful companies have cut or eliminated their dividends only to reinstate or increase them later. If you’re interested in a company that cut its payout, research it to see whether you have confidence in an upcoming turnaround. If not, avoid it for now and wait and see.
Q. What are “equities”? – S.T., Reston, Virginia
A. When you see the word “equities” bandied about in the financial world, it generally just means “stocks.” There is a technical difference between equities and stocks: The term “equity” refers to ownership, or the value of any asset you own, such as stocks – or your home – once any liabilities are subtracted. In general, though, “equities” is usually simply a fancy way of saying “stocks.”
