Christmas has come and gone and Congress has, to this point, failed to reach a deal to avert the "fiscal cliff" fast approaching on the horizon. The uncertainty of expiring tax cuts, tax increases, and drastic cuts to government spending that come along with going "over the cliff" has caused weariness in the market and has investors on edge. While I am among the investors who are cautiously pessimistic that Congress will reach a deal in time to avoid going over the fiscal cliff, I am not worried about remaining invested in the market or continuing to invest new funds.
As a dividend growth investor, I choose to purchase shares of high quality companies that have established themselves as dividend payers (and typically increase dividends annually). I choose companies that I believe represent great values at the price I purchase them, and that have sustainable businesses and competitive advantages that will make them sound investments for the long term. I do not believe in frequent buying and selling or buy and hold forever, but I do believe in buy-monitor-collect a growing stream of dividends-hold for as long as the business fundamentals support your investment decision. For companies like Johnson and Johnson (JNJ) or Exxon Mobil (XOM), or many of the other excellent dividend growth stalwarts, it often works out that the business fundamentals seemingly hold "forever". In addition to offering some sound business fundamentals, these companies pay me to hold onto their shares, and increase their payouts each year. With one of two scenarios likely to unfold over the coming week or so, now is a good time to again review why dividend growth investing could be the appropriate strategy for the world we live in now.
The first scenario would be the market's worst case scenario, and this would be no deal is reached before the December 31st deadline. In this scenario, the Bush Era tax cuts would expire, sequestration would hit government spending, the 2% social security tax cut would go away, and much more would all take effect January 1st. It has been estimated that a taxpayer making $100,000 filing alone would pay a 16% more in annual taxes in 2013 versus 2012. In this scenario, as the U.S. goes over the fiscal cliff, stocks would likely drop significantly as the impacts of these tax increases and over economic impact are digested by investors. If this were to happen, dividend growth investors could seize the opportunity to snatch up shares of great companies with strong competitive advantages at very attractive valuations.
Great dividend growth stocks like Coca-Cola (KO), General Electric (GE), and Procter and Gamble (PG) would also be hit hard and could provide great long term investments. Even though no deal was reached immediately, I believe Congress would reach a deal at some point to compromise on some of the spending cuts/tax increases to reach a more sustainable balance. Once that deal was reached, stocks would likely see a strong bounce on the news and investors could capitalize on those gains.
The second, and I believe more likely scenario, is that Congress passes a patch-work, short term spending bill that pushes the real decision making and compromise several months down the road. In this scenario stocks would rise on the news of a deal, but the uncertainty would re-surface as the deadline for the short term spending bill approached creating an additional buying opportunity. In this scenario, investors could buy shares of currently undervalued companies like CSX (CSX), Intel (INTC), and Caterpillar (CAT) and watch the market closely as the next major spending deadline approached and identify additional undervalued companies to buy into.
Dividend growth investing seeks to balance risk, from the fiscal cliff or other environmental factors, while growing an invested capital and building a growing income stream. By building a high-quality portfolio of dividend growth stocks, purchased at favorable valuations, DGI investors can reap much of the benefits of stable growth and growing income despite challenging economic conditions.
For dividend growth investors challenging market times do not cause them to panic and jump out of the market, but instead represent buying opportunities. These uncertain market times create the favorable valuations that DGI investors thrive upon, and present the best opportunities to reinvest their annual dividends in their current positions or others to grow their portfolios and increase their income even faster. With that in mind, I am remaining invested and looking for new opportunities as the fiscal cliff comes closer and closer, and the buying gets better and better.