Since March, I have been stockpiling cash while dreaming about all the quality companies with increasing dividends that I would soon be adding to my portfolio. In my previous articles, I have discussed my anticipated shopping spree, but in the end it has been pretty limited.. At this point, I am wondering if I am making the right decision to wait for more opportune entry points or if I am simply wasting my time by waiting.
Now that it is May and my tax refund is safely tucked into the portfolio, I have been hesitant to purchase. Sure, there have been a few opportunities and I have recently purchased Bank of Nova Scotia (NYSE:BNS) and a half position in Aflac (NYSE:AFL) but for the most part I have not put my money to work like I had hoped. On the whole, my wish list is still unfulfilled and my portfolio sits too idle with about 20 percent still in cash. It is frustrating to watch your little army of soldier dollars, relaxing on the beach when they should be marching up to take the hill! I keep reminding myself it is prudent to wait for a pullback as entry price is a huge factor in investing success.
But I am beginning to wonder if I am not just letting opportunities pass me by in some of the stable consistent dividend growth stocks. These are the names people will flee to in times of market uncertainty and the kind of stocks that people just re-entering the market will lean towards. On my watch list are Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG), Walgreen (WAG) and Target (NYSE:TGT), Hershey (NYSE:HSY) and Diageo (NYSE:DEO). As I am still within the first year of transitioning to a dividend-growth portfolio, I currently have no other holdings in the sectors these represent. Forgive me, as these are not stocks attractive to a trader. My portfolio is still in its infancy, with rapid accumulation and diversification happening all at once with the transition to dividend growth, and am still fairly new to the world of investing (just two years). In the past year I have moved from six companies to 25, with another 15 on the watchlist, of which I hope to be able purchase at least 10 by the end of the year
Each of the above listed companies is currently overvalued according to FAST Graphs and general sentiment is that it is time for a significant market correction. What if a pullback does not come and I am left on the sidelines, giving up a steady and growing income? In the past I believed my patience has rewarded me. But has it, really? It is time to actually find out. But maybe it would be better to test the waters with small positions and see what happens instead of trying to time the market. Or maybe that's the just the trader still left in me getting restless now that the busy tax season is over.
One purchase stands out to me as the time I took a bigger risk on a pullback that was well rewarded. It was a significant, sudden, short-term drop, which I admit could skew the results toward making it more beneficial in comparison with the average. In March 2011, I started watching and researching Enbridge (NYSE:ENB), and I was soon ready to purchase on a dip. I watched it every day for five months. One August morning as I quickly checked my stocks before leaving for work, I noticed Enbridge had taken a sudden big dive. I peeked around for negative news, but did not see anything that I thought was that dramatic. I watched as the intra-day chart climbed a little, but since I had to leave immediately, I impulsively bought at $28.56, and ran off to work. Forty minutes later I was still a little shaky as I relayed to my coworkers what I had done and the nervousness lasted a few more days. I was still trading at the time and in hindsight, it was a very lucky maneuver. I continued to trade Enbridge successfully, selling when it seemed to get ahead of itself and buying on dips, but for the rest of this discussion, I will not complicate it by taking those other trades into account, but rather refer to the original purchase price as if I had my current attitude of dividend-growth investing then, which I certainly did not. Soon after discovering DGI, I quit trading ENB and kept all the shares I currently had, even as I began to diversify. I sold half of my position this January, in order to diversify, when it once again looked overvalued and had grown to over 30% of my portfolio. For better or worse, I trimmed it recently by half again as it has become very dangerously overvalued on FAST Graphs, in order to bring the position down to a more average size, though it still remains my fourth-largest position.
The questions I want to ask and hopefully answer in this article are: "Would I have been better to wait for the dip to purchase, as I did, or just jump in at the moment of decision with a part position and accumulate more later?" and "What should my approach to purchasing JNJ, PG, WAG, TGT, HSY and DEO be?"
I bought 200 shares of ENB at $28.56 August 5, 2011, for $5722 (incl. $10 trading fee).
I bought more shares over time, but for simplicity in this case I am only dealing with the initial purchase and am limiting myself to that specific number of shares.
Current value May 6, 2013: $9570
Capital Gain: $3848
1 dividend payment of $0.25 = $50
4 dividend payments of $0.28 = $224
1 dividend payment of $0.32 = $64
Total dividends: $338
Total gain with dividends: $4186
What if instead of waiting for the dip, I had bought a half position a few weeks after deciding to purchase, say April 1, instead of waiting for a dip all the way until August, and then bought another half purchase, (just for the sake of randomness), on the first trading day of the next month at the closing price?
April, 100 shares at $30.09 for $3019 (incl. $10 trading fee)
May, 100 shares at $30.43 for $3053 (incl. $10 trading fee)
Total Cost: $6072
Capital Gain: $3498
Extra dividend payments:
1 dividend payment on 100 shares at $0.24 = $24
1 dividend payment on 200 shares of $0.25 = $100
Total dividend payments: $462
Total gain with dividends: $3960
In this case, even with a rising purchase price, it was better to wait for a dip to enter with a better purchase price over the five months I waited instead of establishing a part position immediately. I am actually surprised to see a 5% increase in the total gain for waiting for a better entry point in this example. The difference between them grows if the entire position acquired immediately is divided over four separate purchases instead of two (delaying dividends and incurring higher trading fees). Over a longer term of holding the stock, the benefit of those early dividends will become less significant further pointing towards waiting as the better option.
This is only one example, though a real one for me, which demonstrates that even with price appreciation, and feeling like you may 'miss out' on share price appreciation, it can be better in the long run to wait for a significant dip to buy. This is a specific example with specific parameters and many variables - particularly hindsight and a continually appreciating stock. How would this work out differently for a stock that does not recover particularly quickly or whose price is not as stable? Is it even a valid exercise to analyze decisions in this fashion?
The second question behind the article and the one still left somewhat unanswered is, "Would I be better to initiate positions in some of my watch list names like Johnson & Johnson that seem to endlessly go up (without me!) now, or wait for that some-day dip?"
In Chapter 8, entitled, "The Investor and Market Fluctuations," Benjamin Graham writes in The Intelligent Investor: "It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities" p 205.
In this case, I can easily look at FAST Graphs and see that the names I mentioned from my watch list are significantly overvalued (his 'except') and I am encouraged by Benjamin Graham to be patient. Meanwhile, some of the others on my watch list are already in decline and I can be busy doing research and watching for signs that they have reached the point when there is a true margin of safety.
Would you buy JNJ regardless of the price? If not, how far would you want the price to retrace before entering?
Disclosure: I am long ENB, BNS, AFL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.