The Only Stocks I'd Own Right Now

 |  Includes: APD, BDV, CAT, DLM, PWB, TGT
by: Graham Summers

Because I regularly receive emails from investors who need to remain invested in stocks to the long-side, I thought today we’d discuss which companies to own and why.

Investing has never been easy, but the last 15 years have been some of the toughest investors have ever faced, largely due to the fact that the US stock market has either been in a bubble or post-bubble Crash for most of that time.

Indeed, we officially entered a bear market in 1999 (or 2007 depending on how you look at it) but because so much of the US’s collective wealth and economic activity relies on financial speculation, the Federal Reserve has essentially blown serial bubbles to combat the collapse ever since.

Because of this, many investors today view the stock market with suspicion. After all, if the only investing environments that occur are speculative bubbles or gut-wrenching collapses, it’s hard to find any fundamentally sensible reason to invest in stocks.

Thus, in order to get a sense of why anyone would fundamentally want to buy stocks now, we need to consider how the markets operated before the doctrine of serial bubbles took over.

For starters, the first thing you need to know is that historically dividends have accounted for 70% of all stock market gains.

According to a study performed by the London Business School, when you remove dividends, stocks have returned a mere 1.7% in average annual gains over the last 109 years. To put this into perspective, this is less than you’d make from owning long-term US Treasury bonds (2.1%) over the same time period.

Indeed, if you’d invested $1 in stocks in 1900 and reinvested your dividends, by 2009, you’d have made $582 (adjusted for inflation). Take out dividends and you’d have only seen $6 from price appreciation (adjusted for inflation). Yes, $6 from 109 years’ worth of capital gains.

Put another way, by focusing solely on capital gains when it comes to stock investing you’re only doubling your money about every 18 years (remember, this analysis simply focuses on the returns generated by the market… which outperforms most professional and individual investors). (click to enlarge)

dividendsClick to enlarge

So… if you want to remain invested in stocks to the long-side right now, make darn sure you own a company that pays a dividend. The benefits of this are multiple: aside from providing most of stocks’ historical returns, dividends also provide you with a cushion against market drops (if a company pays 3%, then stocks need to fall more than 3% for you to actually record a loss for the year).

Just as important as the dividend itself, you want to make sure you own companies that will be able to maintain and hopefully grow their dividends. This means companies that have plenty of cash, little debt, and a history of raising dividends.

These criteria alone mean you’re likely to be investing predominantly in large caps (these are the companies that have the cash and the history of paying dividends). Here are a few that have increased their dividends recently (click to enlarge):

dividend growth1Click to enlarge

If you need to stay long the stock market, companies like the ones above are a good place to start looking. But whatever you do, be sure to find companies that DO pay out a good dividend and that WILL likely raise it in the future.