"I'm buying on dips."
"I'm waiting for a pullback."
"I'm heavy cash, waiting for the inevitable correction."
While perusing Seeking Alpha articles, how many times in the last year have you read such statements, either in articles or in comment streams? For me, the total is 7,044 ... not that I'm counting. And I can't remember if that number includes the number of times I've said 'em!
I'm not here to argue for or against any of those ideas. I'm here to discuss the situation in a way that hopefully will make investors -- including me -- think a little about future plans in a market that sometimes seems to be defying gravity.
GE Brought Big Headaches To Life
General Electric (NYSE:GE) is up 17.5% in the last year, outpacing the S&P 500 by 6%. Moreover, since hitting an intraday low of $5.87 on March 2, 2009, GE is up 400%. A few SA authors, most recently Hawkinvest, says it is overvalued and should be sold. Far more, however, seem to be beating the drum for GE, led by Regarded Solutions, who calls it "the perfect stock."
Maybe you think it is a little overheated, but hey, it is a great company and it is raising its dividend again. So why not buy a little more on the dips, buy still more on the pullbacks, build your stake, and live happily ever after?
After all, you only had to buy 100,000 shares on that teeny, tiny dip four years ago, and you would be rich, rich, rich!
Two problems with that statement:
- If you could afford 100,000 shares, even at $5.87, you probably already were rich, rich, rich.
- If you were planning to buy somewhat fewer shares -- say, a couple hundred -- how would you have known to keep cash on hand for when GE truly got cheap, cheap, cheap?
Let's say you bought GE in October 2007 at $41 per share. And why not? It was General Freakin' Electric! A rock-solid, blue-chip, mega-conglomerate that had been growing dividends and earnings for decades. (We now know that its finance arm, GE Capital, was about to bring the company to its knees at the same time the too-big-to-fail banks would bring the economy to the brink of Armageddon, but we didn't know that then.)
When GE first started giving back some gains, no sweat. You could just buy more on the dips. In December 2007, $37 seemed a sweet price for a company that had just announced an 11% dividend increase, making it a 3.4% yielder. In June 2008, GE could be had for 30 bucks a share. This was more than a dip; it was a pullback. And that was OK because, now yielding 4.1%, it signaled a major opportunity for investors. (Full disclosure: That's when I bought my stake.)
As the price continued to decrease and the world's economic woes worsened, some GE investors no doubt were getting nervous. Some certainly bailed. But for many, hey, it was still General Freakin' Electric! Even though the price was slipping, shareholders were "getting paid to wait for improvement" -- another favorite phrase used by dividend investors like me.
Those hoarding cash for buying opportunities certainly saw many over the ensuing months. GE's price fell below $20 in October 2008, under $12 three months later and hit single digits in February 2009 en route to that now-famous $5.87 of March 2, 2009.
The Psychological Test Of Severe Pullbacks
Just how many GE investors kept buying on dips and pullbacks and corrections along the way? How did they know when GE would stop dipping and pulling back and correcting? If they bought at $26, only to see it fall to $22 a month later, did they buy more? Then more a month later? And more and more and more? When did they say: "Enough! I'm not throwing any more money into this bottomless pit!"? When did some of them bail entirely, cursing CEO Jeffrey Immelt and vowing never to buy another GE light bulb, refrigerator or extension cord?
Sure, cash-heavy investors who bought mostly near the bottom have profited nicely. Truth is, however, most folks can bring themselves to suffer only so many wounds from a falling knife.
Many Dividend Growth Investing practitioners say they don't really start worrying until their companies cut dividends. For GE, that didn't happen until June 2009. By then, as we now know, the economy finally was starting its long, slow, fitful recovery that continues today. Nearly five years after buying, my GE investment is still under water, even with dividends factored in.
At Wednesday's close, GE was priced at $23.46. Its quarterly dividend has been raised from 10 cents to 19 cents over the last three years. That's a significant improvement but still well shy of the 31 cents the company was distributing to shareholders before the summer of 2009.
Of the 26 companies I own, GE is just one of 19 that's at or near 52-week highs. The others: Bristol-Myers Squibb (NYSE:BMY), GlaxoSmithKline (NYSE:GSK), Health Care REIT (NYSE:HCN), Kinder Morgan Management (NYSE:KMR), Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), 3M (NYSE:MMM), Altria (NYSE:MO), National Health Investors (NYSE:NHI), National Retail Properties (NYSE:NNN), Realty Income (NYSE:O), Omega Healthcare Investors (NYSE:OHI), Procter & Gamble (NYSE:PG), Philip Morris (NYSE:PM), Southern Company (NYSE:SO), Vodafone (NASDAQ:VOD), Walgreen Co. (NYSE:WAG) and Waste Management (NYSE:WM).
I consider them all great companies (or else I wouldn't own them). I'd like to increase my stake in several of them and open positions in companies I don't own yet. So I'm waiting for dips and pullbacks.
But how will I know if a dip isn't just the first step of a correction or even a crash? If I start buying on pullbacks, how will I know when to stop buying or even to start selling?
No More Intels, Please!
Last April, I bought Intel (NASDAQ:INTC) on a dip for $28.42. A month later, I bought it on a pullback at $26.56. In October, I wrote an article asking if Intel -- then priced just a shade under $22 -- was a classic example of a falling knife. Wednesday, Intel closed at $21.18.
So have investors been "smart" to buy Intel on dips and pullbacks repeatedly over the course of this past year? Or have they simply been throwing good money after bad, with Intel languishing even as the rest of the market has soared?
I remain confident that one day I'll be glad I own Intel, and I'm grateful for its hefty dividend. So I'm not selling ... but I must admit I'm not as confident in the company now as I was nine months ago.
Even most of us who invest primarily for dividend growth don't particularly enjoy seeing our holdings fall 25% or more a few months after we initiate positions in them. I have stopped buying Intel on the dips and, aside from reinvested dividends, I won't put another cent into the company until I feel better about its long-term prospects.
Conclusion: Correction Is Coming ... Right?
Roughly 35% of my portfolio is in cash. I only started embracing DGI last year and I'm still in the accumulation phase. I want to own more good companies but I want to buy them at bargain prices, or at least at fair value.
Lately, I've just been dabbling a little, opening small positions in Enbridge Energy Management (NYSE:EEQ) and Kinder Morgan Inc. (NYSE:KMI) while adding to Vodafone. Otherwise, I'm waiting for -- say it with me, kids -- dips and pullbacks to do more serious buying.
I just hope that after buying on 3% dips and 10% pullbacks, I'll have enough cash left over to take advantage of the big-time correction when it comes. With this bull market entering Year No. 5, a correction has to be coming, right? Right?