Those of you who have faithfully followed my exclusive articles on Seeking Alpha know that I'm highly focused on dividend income investing for retirement, and/or a more secure financial future.
While the Team Alpha Retirement Portfolio is a hybrid for dividend investors, there are stocks within the portfolio that should be focused on when a market has uncertainties. The portfolio consists of Ford (F), Chevron (CVX), Apple (AAPL), McDonald's (MCD), Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), BlackRock Kelso Capital (BKCC), Procter & Gamble (PG), CSX Corp. (CSX), Realty Income (O), Coca-Cola (KO), Cisco (CSCO), Newmont Mining (NEM), Wells Fargo (WFC) and Intel (INTC).
Market Uncertainty And Dividend Stock Selection
We live in a financial environment that seems to have thrown us many curveballs in the past few years, but the markets continue to rise for the most part. Every time we have seemed to be nearing a correction, the market bounces back, almost defying gravity. That makes the market conditions, as well as selecting which stocks to own, very challenging.
We can be the greatest stock pickers around and still lose plenty of money. Uncertainty, fear and panic are investors' worst enemies. Plenty has been written about which stocks might be the next best thing, but in my 45 years of investing experience, the one feature I look for when deciding what stocks to own during uncertain times is if the company and the business has pricing power.
If a company has pricing power, it can raise prices of their products without loss of too much revenue, if any. These are the companies that will be able to continue to pay dividends, increase them and keep shareholder value intact no matter what the near term economic climate happens to be.
The Power Of Pricing Power
The basics of pricing power are as follows:
- A company can raise prices without fear of losing customers or revenue.
- A company that has products that consumers need no matter what the economy is, or interest rates are, or if inflation is pounding away our buying power.
- The company has value added to its products, sufficiently enough, that consumers will continue to buy them at just about any cost. (Tobacco products used to be a perfect example.)
- The market segment is so enormous that even if prices are increased and revenues dip, the effects will be minimal on shareholder value.
Of course this is the average Joe way of understanding pricing power. For the rest of you math whiz folks, let's look at a chart (of course).
The above chart is from a favored educational site of mine, but a bit more complex. Here is what this chart is showing:
- Perfect competition
- Price-taking firms each with no influence over the ruling market price
- Free entry and existing businesses in the long run - long run normal profit equilibrium
- Each supplier produces homogeneous products - each a perfect substitute - hence the perfectly elastic demand curve for the individual supplier
The bottom line in plain English - the companies do not compete and demand does not drop=PRICING POWER.
So much for the "high-brow" peek into pricing power. Even Warren Buffett has weighed in on pricing power. He has stated often that he feels that if a company has pricing power, even just average management can be successful.
"The single most important decision in evaluating a business is pricing power," Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel (in 2011). "If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business." ......"The extraordinary business does not require good management."
That pretty much sums it up without all of the fancy graphs. So which stocks would be in this elite category of having pricing power no matter what? Well, If we think about what consumers must buy in any economic climate, we will zero in on a nice bunch of stocks within our portfolio.
XOM and CVX: Need energy? The price of oil can go to $200/barrel and we still need it and will still pay for it. PRICING POWER.
JNJ: We will NEVER cut back on our healthcare spending. Prices on must have products can be increased easily without losing revenues. PRICING POWER.
PG: We need to eat and to have the basic necessities of life. If PG raises prices, we will still buy most of its products. PRICING POWER.
CSX: Shipping by rail is perhaps the least expensive way of getting products from point A to point B. If prices are raised, manufacturers will continue to use railroads. PRICING POWER.
In times of uncertainty, I would set my sights on adding shares of XOM, CVX, JNJ, PG, CSX and many others that are not in the Team Alpha Portfolio currently.
Each of these companies have pricing power to various degrees. For dividend income investors, we want to be almost certain that our income will continue to flow, no matter what.
Coming Up Next
In my next article I will discuss the BBB stocks to own in uncertain times. No, it does not mean Better Business Bureau approved stocks, although they all would pass with flying colors.
Stay tuned, we will navigate this market together folks.