Summary: Weird Oil Prices And The Search For High Dividends<br> By now you’ve heard that in some places in the world, interest rates have turned negative. When interest rates are negative, it means you can borrow money and receive interest payments from the bank instead of paying interest. I know it sounds crazy and it is crazy—a crazy, messed-up thing. But now because of Covid-19, something crazier just happened. It’s called negative oil prices.<br> That’s right, the price of oil went below $0. Essentially, it means that a seller of oil, like the US or Saudi Arabia, Russia and others, could actually pay the buyer to take possession of the oil. It’s like filling up your tank at the gas station and getting paid to do it. Crazy! How could this happen?<br> Oil Surplus Meets Covid-19<br> Well, it seems the world is running out of places to store all the excess oil that continues to build up. The excess continues to rise because production has remained strong just at the time demand has fallen off a cliff. All the storage tankers are filling up, all of the ships with tanks to hold oil are filling up, and even though Russia and Saudi Arabia have come to an agreement to start reducing their output in May, demand is so incredibly weak right now that it has created this whopping excess. It’s another example of the unexpected effects brought on by an unprecedented viral calamity.<br> One trader, writing in Forbes Magazine blamed the sharp drop on an exchange-traded fund with the symbol USO that holds oil futures in its portfolio. His reasoning had to do with an anomaly in the way the monthly contracts traded.<br> So, oil has become incredibly volatile, just like the stock market. In early March, oil prices had fallen 75% since the beginning of the year, and as I just mentioned, even went negative for a brief period of time.<br> Last Thursday though, oil rebounded by 20%, but it did little to erase the losses since the beginning of the year. The two most important issues going forward will be the reduction in production in an attempt to balance the supply with demand, and also to see demand rise to meet supply. Both are very far apart right now, and it will take dramatic cuts in production to bring them in line. There is movement, however, because according to some reports, we are starting to see major cutbacks in production right now. Let’s keep an eye on this one.<br> Re-Thinking Dividends<br> Another theme I want to examine today is the question of dividends. Dividends are a very important source of income for investors and also represent a good percentage of the stock market’s historic rate of return. As companies experience significantly lower profits though, the portion of those profits that come to us as dividends may be affected.<br> It makes sense that companies losing billions of dollars are going to drastically reduce, suspend, or eliminate their dividends. And that’s exactly what is happening in some industries.<br> Some companies that have already suspended dividend payments are Ford, Delta, Carnival Cruise Lines, Las Vegas Sands, Marriott, Macy’s, just to name just a few.<br> According to Goldman Sachs, the money paid to shareholders as dividends will likely be reduced by 25% in 2020—and that’s an average of the S&P 500.<br> So which industries do you think will cut their dividends?<br> 1. Energy, for one, based on oil at $20/ barrel.<br> 2. Entertainment—which, with the exception of streaming, has basically disappeared.<br> 3. Travel—there is none.<br> 4. Restaurants—all closed.<br> 5. Retailers with stores—I don’t have to explain that.<br> Choosing those were pretty obvious. We can see that all around us.<br> But what about bank stocks with the possibility of tons of bad loans? What about real estate with people deferring their rent or working from home? Will they ever go back to offices? Nursing home stocks with coronavirus protection issues?
