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?