Each day I watch the stock market in awe. At 4 PM EST, I read a headline like “Stock Market Sets New Record” and when I log online in the morning I am reading an article about how the market is up in the pre-market once again. By the end of the day, it is like de ja vu and I start the process all over again. This market makes finding stocks the meet our stock screener difficult, how could it not? Well, I have been thinking a lot about where I want to allocate my capital recently and what I want my next move to be. After doing some research on various blogs, including some articles written by my fellow Diplomat, I find myself considering the option that the title of the article outlines. Is now the time to accelerate the payments on my student loans?
The Dilemna
Last night at the hotel, I spent some time running various stock screeners to try to find some undervalued stocks to add to a watch list. Lanny just published his December stock watch list over the weekend and it inspired me to compile a listing of stocks of my own. What I found didn’t excite me or surprise me one bit and I doubt it will shock any of you either. P/E Ratios are sky-high. The S&P 500 has a 24.87x P/E Ratio per the WSJ, an increase from 22.73X at the same time last year, while the DJIA’s is showing a PE ratio of 21.72X compared to 16.83X a year ago. The kicker came when I read My Dividend Pipeline’s recent article about selling General Mills after a massive run-up. He recognized a 63% gain after owning the stock for just a few months Think about that…a 63% gain after just a few months for a consumer staple dividend stock. Insane.
Are there deals to be had? Of course. Dividend stocks would not have made it on Lanny’s stock watch list if they were too expensive and didn’t meet aspects of our screener. Leaving my experience running screeners uninspired, I spent the rest of the night debating where I should go from here. Should I hoard capital and wait for the stock market to decrease? Should I stash some more money away for a down payment our future first house? I looked over a few old articles on our website, specifically, Lanny’s Pay Down the Mortgage vs. Invest Series (Part I – The Original and Part II – The Rising Interest Rate Environment) to find some inspiration in this situation. Obviously I don’t own a house or else you all would know about it here. But if you all recall, I recently wrote about how I am going to aggressively try to pay down my wife’s student loans in less than two years to wipe this high yielding interest rate off of our personal financial statements. AH HA! The light bulb flashed on. Similar to Lanny over the years, I to found myself debating about whether I should pay down my debt or should invest in the market.
My situation is different from Lanny’s though. In his case, his debt is longer in nature and each additional payment directly reduces principal, builds equity in his house, and reduces the future interest to be paid on his mortgage. Also, his interest rate is 4.375%, which is now in line with the current interest rate environment versus the last several years where that rate exceeded the current market rate. In my case, clearly a student loan is a different type of note compared to a mortgage and I feel ridiculous for typing such an absurd statement. But I am not building equity with each payment and the interest rate (north of 6%) is way higher than most dividend stocks. Currently, the S&P 500 is yielding just north of 2% and the DJIA is yielding nearly 2.4%. Meanwhile, my portfolio’s yield has decreased from over 4% a few years ago to 3.3%, another example of how much the stock market has appreciated over the last two months. Despite the fact I keep referencing Lanny’s situation from his articles, we are dealing with apples and oranges here.
My Thoughts on Investing or Paying Down Student Loans
Based on my situation above, I am going to continue to carefully weigh the pros and cons over the next few months. Here are some of the thoughts that have been going through my head and I would love to have your insight/perspective on my thoughts and add some of your own to the comment section.
-Why Invest for the sake of investing? Our investing strategy is to find undervalued dividend growth stocks. We have a stock screener that helps us find investments that meet our “strict” criteria. If a stock is too expensive and does not meet our P/E Ratio threshold, then don’t force yourself to buy a stock for the sake of buying a stock. Stick to your methodology and wait for the right opportunity to present itself.
-The disparity between the current market’s yield, my portfolio’s dividend yield, and the interest rate on the student loan is large. The interest rate on our student loan debt is triple the yield of the S&P 500 and double the yield of my portfolio. Where am I going to find quality investments with a dividend yield greater than my student loan interest rate? I feel like I would need to sacrifice quality and reach for dividend yield in order to find a company with a yield greater than the student loan interest rate. I’ve been bit reaching for yield before and I learned my lesson the hard way. Reaching for yield is NEVER THE ANSWER.
-Accelerating our student loan payoff plan and paying off the darn debt would free up capital in the future. Without strict monthly payments on student loans, we could easily implement an aggressive plan to pay down our future mortgage (Similar to Lanny) or we could use the extra free cash flow to invest heavily in the market. Hopefully by this time, the valuations will cool down and we will return to more reasonable multiples and valuations. So basically, I can summarize this though as passing on investing now while the market is high, use the cash to pay down the debt, and free up capital for future investments.
-Do I really want to slow down the growth rate I have seen over the last few years? A few months ago, I crushed my 2016 goal of $3,250 in forward dividend income. What was crazy is that I considered that a stretch goal at the time I set it. When I set our plan to payoff our student loans in six quarters, I calculated the plan making the assumption that we would have enough capital to invest and pay down or debt and my dividend income would continue to grow. However, passing on investing for an extended period of time would halt the impressive growth rates I have realized over the last year and I would delay all the benefits we constantly blog about in this community for a year. I am well aware of how important it is to build my portfolio now at a young age, so why stop a good thing?
-Isn’t this really about timing the market? And I am not naive enough to think that I am smarter than the market or I have anywhere close to the amount of necessary information needed to think that I can adequately timing the market. What if this is the new norm? What if I keep my cash on the sideline waiting for the market to fall down only to continue reading headlines about how the market keeps increasing and increasing?
-Wouldn’t it be awesome to rid myself of the debt? Nothing would be better than not having to submit that monthly student loan payment.
So here I am, facing the same (but different) debate as Lanny between two options that will no doubt improve my financial position. I don’t think there is a wrong answer to the question, but I am still debating which approach I will take as I head into 2017. The key is to remain flexible and take what the market and current environment is giving you, so having multiple options at my disposal is a good thing. But I would love to get your feedback on my thoughts in this situation and hear about what you are doing if you find yourself in the same spot. Have you altered your strategy based on the ever-increasing stock market?
-Bert