An Apple to Orange Savings Strategy to Avoid

Feb 2012

Wall Street, in its infinite wisdom, never ceases to amaze me as to how much free, and at times dangerous investment advice it doles out. I often wonder if the people on Wall Street even think about the advice they give and how it might influence the actions of the average investor and saver. The popular advice I read or hear about these days is how “savers” can earn higher yields from what they can earn parking cash in savings, interest-bearing checking, certificate of deposits and even Treasury Bills by investing in high dividend-paying common stocks.

Investing in companies that pay consistent and steady dividends is a sound investment strategy and I believe should be part of any long-term investment portfolio. At Bloom Asset Management, many of the higher dividend paying stocks can often be found in the domestic and foreign large company value-oriented mutual funds we implement in many of our client portfolios. Nevertheless, the strategy of taking one’s emergency cash or savings and investing them in higher yielding dividend stocks is a confusion of goals and objectives, and quite stupid.

I think conventional wisdom is often times dangerous, but the gurus doling out this advice must think everyone is dumb. In other words, don’t take the bait. Stocks are long-term assets and should be matched with long-term goals like retirement or college planning. Money market accounts, certificate of deposits, and other savings vehicles are appropriate for short-term purposes (less than five years typically). The attraction to high dividend paying stocks is understandable, but high yielding dividends alone will not help much when a stock has lost value and you need to sell because you need cash.

And the fact that the Federal Reserve is keeping rates at 0% (until at least 2014) to help prop up the economy also hurt savers and is partly responsible for the attraction to higher yields. But remember, there are always risks involved in investing in stocks, whether they pay dividends or not. Don’t succumb to Wall Street’s fetish with high yielding dividend stocks. If you want to protect your cash and earn a little higher return than your neighborhood bank offers, then search for higher savings accounts at You can also establish online savings accounts through firms such as American Express and ING, among others. Those companies generally offer higher yields than your local bank and you won’t have to worry about the account dropping when the stock market declines or if a company stops paying its dividend.


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