For many investors, there is no clear conviction as to how they should invest. Today’s investments are guided by what was read yesterday, and the popular media is constantly churning out new and different ideas. Granted it makes for some “interesting” reads, but it certainty is no way to run a portfolio.
Recently, I read a Wall Street Journal article on “Rethinking Stocks’ Starring Role” in our portfolio. It presented the same set of facts we have seen in numerous other articles on how bonds have recently out-performed stocks. That is not what caught my attention, but instead it was the numerous directions the article took the reader. In the end, virtually anything you were doing, except practicing fundamental asset allocation, you could find support for in this article. Here are a few excerpts:
- “Asset allocation should be ‘more dynamic’. There are a lot of opportunities on the other side of the balance sheet.” Andrew Silverberg, co-manager of Alger Balanced Fund referring to corporate bonds
- “There’s no single answer to the question of how a typical investor should allocate assets. But he adds that most investors should put at least 20% into alternatives. ” Rob Arnott, chairman of money manager Research Affiliates in Newport Beach, Calif.
- For investors with a heavy stock exposure, “this is the perfect time to move elsewhere,” including alternative assets such as commodities, Mr. Arnott says.
- “Any kind of strict percentage allocation doesn’t make sense,” says Steven Romick, manager of FPA Crescent Fund. “It’s just ridiculous.” FPA Crescent has a go-anywhere mandate.
- “A lot of people who said they wanted to be aggressive [in investment approach] realized last year that they weren’t comfortable with that,” he says, adding that he increased some investors’ stock allocations in the first half of August.
And finally, to keep from totally alienating the stock investors:
- Still, many financial pros continue to believe that stocks should be the biggest element of a long-term portfolio. Ned Notzon, chairman of the asset-allocation committee at T. Rowe Price Group Inc., believes stocks will generally beat bonds over long time periods. And he says it’s hazardous to try to sidestep periods of weak stock performance and then heavily invest in shares in the good times.
If you invest without conviction, it is a recipe for disaster. Time has shown that emotion is an investors worse enemy. To paraphrase Warren Buffett, emotion will make you greedy when you should be fearful and fearful when you should be greedy. So how do you overcome this?
An asset allocation model was designed to help investors overcome their natural instinct of doing the wrong thing. The basic formula for success in the market is buy low and sell high. An asset allocation model helps you achieve this goal. When a segment declines, you have two choices to get your allocation back in line, buy more of what declined (buy low) or sell what didn’t (sell high). But to do this, and go against your emotions, requires a belief in your asset allocation and your investing process.
Herein lies the problem. Many investors don’t have a process, an allocation and thus, have no conviction. They read something that has been very successful then follow it until it loses money, at which point they sell and start the process again. This continues until they become frustrated and pull out of the market. They will later reenter the market when it appears that ‘everyone is making money.’
My conviction is dividend stocks. I have researched it and found that it has been successful over long periods and in many types of markets. Also, dividend stocks provide you positive feedback each time one pays or raises its dividend. Below are several bellwether dividend stocks for your consideration:
Johnson & Johnson (JNJ) – Analysis
Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. The company has raised its dividend for 47 consecutive years. With a 7.5% dividend growth rate, JNJ will double its dividend every 9.6 years. The stock is currently yielding 3.20%.
The Procter & Gamble Company (PG) – Analysis
The Procter & Gamble Company is focused on providing branded consumer packaged goods. PG has raised its dividend for 53 consecutive years. With a 7.3% dividend growth rate, the company will double its dividend every 9.8 years. The stock is currently yielding 3.33%.
Abbott Laboratories (ABT) – Analysis
Abbott Laboratories is engaged in the discovery, development, manufacture, and sale of a range of health care products. The company has raised its dividend for 37 consecutive years. With a 8.4% dividend growth rate the stock will double its dividend every 8.6 years. ABT is currently yielding 3.51%.
The Coca-Cola Company (KO) – Analysis
The Coca-Cola Company is a manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world. The company has raised its dividend for 47 consecutive years. With a 7.9% dividend growth rate, KO will double its dividend every 9.1 years. The stock is currently yielding 3.28%.
Wal-Mart Stores, Inc. (WMT) – Analysis
Wal-Mart Stores, Inc. serves customers and club members more than 200 million times per week at more than 8,000 retail units under 53 different banners in 15 countries. WMT has raised its dividend for 35 consecutive years. With a 11.3% dividend growth rate, the company will double its dividend every 6.5 years. The stock is currently yielding 2.11%.
McDonald’s Corporation (MCD) – Analysis
McDonald’s Corporation franchises and operates McDonald’s restaurants that serve a varied, limited, value-priced menu in more than 100 countries globally. The company has raised its dividend for 32 consecutive years. With a 15.5% dividend growth rate the stock will double its dividend every 4.8 years. MCD is currently yielding 3.56%.
I am so confident in my process that I gleefully welcome downturns as buying opportunities. Let the others flee to whatever the pundits are recommending this week, a scared market provides cheaper stocks. To be a long-term bear in U.S. equities, one must believe the underlying companies are flawed. And if that is the case, which I do not believe, then the U.S. and the world economies have bigger problems than the equities markets.
Full Disclosure: Long JNJ, PG, ABT, KO,WMT, MCD. See a list of all my income holdings here.