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Hedging a Dividend Portfolio for a Market Correction

Investing Commentary

With markets reaching new highs, I’ve been thinking a lot recently about hedging my dividend portfolio.  In my case, I’ve put a little over $100,000 to work over the last 6 months and have only seen a roughly 2 – 3% gain in that invested money.  I am, however, more concerned with creating dividend income than increasing my total portfolio value.  Still, nobody likes to see huge red negative numbers next to their holdings.  I’ve put down some of the options I’ve been thinking through on how I can hedge my dividend portfolio in case of a large market correction.

Pay a professional

The first and easiest option to hedge my dividend portfolio is to pay someone else to do it for me.  I could invest a in a numerative amount of hedge funds.  Many hedge funds have a minimum 500k buy in… MINIMUM.  So, that dog don’t hunt.  There are other options as well.  I could hedge like banks and other financial institutions do.  JCRA’s guide to hedging risk using financial derivatives has an interesting walk through on those options.  But again, I’m not a financial institution and am nowhere close to having that kind of cash to invest.  So, in my case, enlisting professionals to do it for me just isn’t an option at the moment.

Hedge with ETFs

Timing my hedging based on market conditions is a viable option.  There are loads of ETFs I could short and even leveraged inverse (short) ETFs like SH, SDS or SPXU that I could use to protect the total value of the portfolio in the case of a significant market correction.  But, we again run into a snag.  First, how does one effectively time a gigantic sell off?  I don’t have an accurate way to predict a correction to side step the declines.  Permanently holding a hedge would be a huge waste of money, especially with the bear continuing to run.  

Hedging with Dividends and Cash

Since the stated purpose of my dividend portfolio is to produce consistent cash, I’m kind of already hedged. None of the companies that make up my portfolio are going to stop paying if there is a 10, 15, 20 or 25% correction.  For the most part, I own companies that have a long history of consistent dividend payouts, even during tough times.  

I also maintain a decent cash position just itching for a large market correction.  Frankly, those still in the accumulation phase should welcome a market correction and have a large shopping list of companies they would love to buy for 20% off.  I know I do.  

Now, it can easily be argued that there is a cost to keeping cash ready to invest.  It’s true.  Although I am losing potential returns (and dividends) from not investing the cash, it’s not costing me cash.  Also, that side-line cash will eventually be some of the most productive money as it will be buying some great companies at fantastic discounts!

 

Do you hedge your dividend portfolio or keep cash ready for those big sale days?

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I'm a dividend growth investor who is aiming to retire in 7 years at the age of 45. My goal is to live off the income my dividend portfolio and rental property produce exclusively and leave the corporate rat race. I hope you will join me in this journey!

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  • catfishwizard Oct 2, 2017, 10:42 am

    How does the saying go? More money is lost by positioning for the next correction than will be lost in the next correction.

    In your case it sounds like you don’t need to liquidate any of those holdings anytime soon to access the value of the shares, so the “losses” would just be imaginary cost basis bucks anyway.

    If you really need the money in a short time frame, it probably shouldn’t be invested in equities. If you don’t need the money any time soon, you don’t need to hedge.

    • Blake Oct 2, 2017, 11:12 am

      Hi CFW,

      Exactly! All the articles I read from traditional media outlets build up this devastating story about a looming correction and how to protect yourself from it. I read them and think, I’m ready for some substantial declines so I can get my hands around some values.

      As far as the importance of hedging – I understand people live and die by their total account balance. That’s just not my world.

      Thank you for dropping in, its good to hear from you again!

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