Retirement Strategy: Is Boring Becoming Bubbly?

 |  Includes: JNJ, KO, PG, T, XOM
by: Regarded Solutions


As the hot stocks wither, the boring stocks have become even more beautiful.

The markets indices have gotten walloped but the dividend champs have become the new "safer haven".

Investors are awakening to the magic of dividend growth investing for income, as well as capital appreciation.

Some investors call dividend growth investing a cult like approach. While many more investors these days see dividend income as a sound strategy to create wealth as well as cash flow, it is far from a cult. As a matter of fact, during the last market drop between 4/3-4/10, the dividend growth stocks outperformed virtually every other type of stock or investment.

Some folks are beginning to call yet another "bubble" in the dividend growth stocks. They point to higher PEs and higher dividend payouts as signs of trouble but I would argue that since the yields on fixed income investments are so lousy, more and more investors have found the dividend growth stocks to be a "safer haven" until both short term and longer term rates rise and stabilize.

The Market Indices Have Been Walloped

Last week, investors, including myself, felt that we were finally seeing the long awaited bull market correction. Here are what the individual market components did between April 3rd through April 10th.

  • The Dow dropped from 16,572 to 16,042. An almost 5% drop.
  • The S&P 500 dropped from 1,890 to 1,833. Slightly more than a 4% drop.
  • The Nasdaq dropped from 4,276 to 4,054. Nearly a 6% drop.

The pundits were all screaming and yelling that the big correction was now upon us, and given yesterday's action after several up days, maybe it actually is.

That has not stopped the mega cap blue chip dividend winning stocks however. As we can easily see during the same time frame (4/3-4/10) how our new BTDP has performed (Buy The Dips Portfolio).

Let's Compare The 4/3 Price Of Each Stock To The 4/10 Prices

The BTDP consists of the following stocks: AT&T (NYSE:T), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), General Electric (NYSE:GE), McDonald's (NYSE:MCD), Chevron (NYSE:CVX), Apple (NASDAQ:AAPL), Altria (NYSE:MO), Ford (NYSE:F), Microsoft (NASDAQ:MSFT), Wal-Mart (NYSE:WMT), and Pfizer (NYSE:PFE).

While the effects of the broad sell-off hit these stellar blue chips somewhat, the dip was only half of what the overall S&P 500 experienced.

I believe the reason to be that there were 3 events taking place:

  • Less retail selling of the mega cap blue chip dividend paying stocks.
  • A greater amount of dollars flowing into the dividend paying stocks both for a safer haven as well as dividend income for a more secure financial portfolio.
  • The dividend yield of these stocks began attracting both bond investors and growth stock investors.

Here is a chart with a straight to the point comparison of each stock:

Symbol 3-Apr 10-Apr
T 35.65 35.12
XOM 97.93 96.78
JNJ 98.26 96.54
KO 38.07 38.89
PG 80.09 81.09
GE 26.23 25.58
MCD 97.66 99.43
CVX 119.04 116.69
AAPL 538.79 523.48
MO 37.59 37.82
F 16.39 15.63
MSFT 41.01 39.36
WMT 77.46 76.89
PFE 32.39 30.61
Click to enlarge

The dip in the BTDP was just about 1.6% but the overall dividend yield remains at 3.60% (with the new inclusion of MO) so the income is unchanged.

To further support my thesis, take a look at this Wall Street Journal article (via Fidelity).

There Is No Bubble In Boring

It is true that the PE averages of these stocks have gone up, but the overall average is well below even the most aggressive bubble scenario (roughly 16.00 versus a more frothy 26.00 7 years ago, just before the great recession).

I also believe that this earnings season will show healthier gains in both revenues and earnings, pushing the future PE ratios down a bit, and might even become called undervalued by that one metric.

Dividend payout percentages might have climbed a tad, but were still sitting at roughly 51% for these stocks, so it is far from any dividend bubble scenario. As revenues and earnings increase, those payout ratios will also dip under 50%, which for me is a great sign for the strength of future dividends and dividend increases.

Corrections Will Eventually Affect All Stocks And Sectors

Bull market corrections are inevitable and we will eventually see a sustained one I believe. I have no idea when (perhaps we already began), but what I do know is that for the dividend income investor, who seeks a more secure financial future, investing in mega cap, blue chip stocks, that pay us to hold on, is more of a safe haven for an investor than just about any other investment strategy.

Unless there is another major financial collapse, these blue chips should weather any storm and continue paying us our incomes. Would I be a buyer at current levels?

Not yet, but that is a topic for another article.

Disclaimer: The opinions of this author are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.

Disclosure: I am long AAPL, F, GE, JNJ, KO, MCD, T, XOM. 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.