For many investors, there is no clear conviction as to how they should invest. Today's investments are guided by what was read or heard yesterday, and the popular media is constantly churning out new and different ideas. Granted, it makes for some "interesting" reads, but it certainly is no way to run a portfolio.
A September 2009 Wall Street Journal article on "Rethinking Stocks' Starring Role" in our portfolio presented numerous ways investors could succeed in the market. In the end, virtually anything you were doing, except practicing fundamental asset allocation, could find support 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.
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.
Investing With Conviction
If you invest without conviction, it is a recipe for disaster. Time has shown that emotion is an investor's 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.'
A Dividend Growth Stock Conviction
My conviction is dividend growth stocks. I have researched it and found that it has been successful over long periods and in many types of markets. Also, dividend growth stocks provide you positive feedback each time one pays or raises its dividend.
Below are five bellwether stocks that are found in most hard-core dividend growth stock portfolios, and have increased their dividends for decades:
Emerson Electric Co. (EMR) designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial, and consumer markets around the world. The company has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 56 consecutive years. The stock is currently yielding 2.8%.
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 51 consecutive years. The stock is currently yielding 3.30%.
The Coca-Cola Company (KO) is the world's largest soft drink company, KO also has a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 50 consecutive years. The stock is currently yielding 2.7%.
McDonald's Corporation (MCD) is the largest fast-food restaurant company in the world, with about 33,700 restaurants in 119 countries. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 36 consecutive years. The stock is currently yielding 3.2%.
The Procter & Gamble Company (PG) is a leading consumer products company markets household and personal care products in more than 180 countries. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 55 consecutive years. The stock is currently yielding 3.0%.
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 equity markets.
Full Disclosure: Long EMR, JNJ, KO, MCD, PG. See a list of all my dividend growth holdings here.