Seeking Alpha
Recommended for you:
Newsletter provider, research analyst, portfolio strategy, portfolio management
Profile| Send Message|
( followers)  

Summary

  • Market indices are moving too high too fast.
  • The likelihood of a correction gets stronger everyday.
  • As a dividend growth investor, the focus is ALWAYS on income, not on share price.

We all know that the market will correct at some point, we just do not know when or by how much. My personal opinion is that once we have a real correction that lasts longer than a week, it will be much steeper, and last longer than the little baby pullbacks we have had throughout this bull market.

Let me be clear, I believe that the market will move much higher over the next 12-24 months. Here are a few of my own reasons:

· The only sector that appears to be in somewhat of a bubble is the bond market.

· Equities are turning a corner towards greater profitability and revenue growth as the world economy heals.

· The rotation out of momentum and higher valuation stocks seems to have ended.

· Money has poured into dividend paying mega caps as the "flight to safety" and will likely be held longer in most portfolios as these stocks pose less of a risk.

· The Federal Reserve will maintain an accommodative posture much longer than they say, and deflation is a bigger issue than inflation. Otherwise, the Fed would have reversed course at this point.

· The zero interest rate policy will enable the financial markets to borrow cheap money to move or "sell" at better profits which will translate into more lending towards existing businesses, as well as start-up companies.

There are dozens more that I can list but I am trying to keep this article as short and direct as possible. That being said, when a correction does finally happen, I believe it could be a drop of 20-30% and shake out the weak hands in virtually every stock sector, except one: The premium dividend paying stocks.

Using Our BTDP, Let Me Illustrate What A Correction Of 30% Would Look Like

The portfolio has been built with mostly the cream of the crop dividend champion stocks except for a few that will become one in the future.

The BTDP consists of 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).

Here is part of a chart of last month's update of the "By The Dips Portfolio":

Buy/Wait

52 wk lo

52 wk hi

TGT PRICE

Symbol

Shares

Orig.Yield

Dividend

Yrly Income

Share Price

Tot.Cost

Tot. Value

30-May

Tgt Price

% To Sell

Tgt Price

% To Sell

Fwd P/E

BUY

31.74

39.01

35.37

T

300

5.60%

1.84

552

31.95

9585

10641

$35.47

$47.00

25%

$64

50%

12.73

WAIT

84.79

101.74

91.72

XOM

100

2.80%

2.76

276

90.05

9005

10053

$100.53

$135.00

25%

$180

50%

13.21

WAIT

81.71

99.38

90.54

JNJ

100

3.10%

2.8

280

86.78

8678

10145

$101.45

$129.00

25%

$174

50%

16.28

BUY

36.83

43.43

40.13

KO

200

3.00%

1.22

244

37.21

7442

8180

$40.90

$56.00

25%

$75

50%

18.26

WAIT

73.61

85.82

79.72

PG

100

3.10%

2.41

241

75.71

7571

8078

$80.78

$108.00

25%

$150

50%

17.72

WAIT

21.11

28.09

24.61

GE

300

3.60%

0.88

264

24.35

7305

8001

$26.67

$36.00

25%

$49

50%

15.08

WAIT

92.22

103.71

97.91

MCD

100

3.50%

3.24

324

93.02

9302

10143

$101.43

$140.00

25%

$186

50%

16.17

BUY

109.27

127.83

118.55

CVX

100

3.60%

4.28

428

111.14

11114

12278

$122.78

$166.00

25%

$222

50%

11.12

WAIT

385.11

575.14

480.12

AAPL

15

2.25%

13.16

197

526.45

7897

9844

$632.56

$783.00

25%

$1,053

50%

13.66

WAIT

33.12

38.58

35.85

MO

100

5.20%

1.92

192

37.71

3771

4155

$41.55

$56.00

25%

$75

50%

15.13

WAIT

12.65

18.02

15.34

F

400

3.20%

0.5

200

15.15

6060

6572

$16.43

$23.00

25%

$30

50%

8.89

WAIT

28.51

41.66

35.08

MSFT

200

2.80%

1.12

224

40.16

8032

8190

$40.95

$60.00

25%

$80

50%

14.38

BUY

71.51

81.37

76.44

WMT

100

2.50%

1.92

192

76.11

7611

7676

$76.76

$114.00

25%

$152

50%

13.73

BUY

27.12

32.96

30.04

PFE

200

3.20%

1.04

208

32.18

6436

5926

$29.63

$48.00

25%

$64

50%

12.93

x

x

x

x

Div.Cash

x

x

x

x

x

633

x

x

x

x

x

x

3.60%

x

3822

x

109809

120,515

x

x

x

x

x

120,130

A 30% drop in these stocks would look something like this, based on the previous update:

Symbol

30% Drop

TGT PRICE

Div Income

T

$25

35.37

552

XOM

$70

91.72

276

JNJ

$71

90.54

280

KO

$28

40.13

244

PG

$56

79.72

241

GE

$18

24.61

264

MCD

$71

97.91

324

CVX

$86

118.55

428

AAPL

$65

74.51

197

MO

$28

35.85

192

F

$11

15.34

200

MSFT

$28

35.08

224

WMT

$56

76.44

192

PFE

$20

30.04

208

x

x

x

3822

This chart shows you all you need to know as a dividend income investor. Yes the portfolio value will have dropped by 30%, but it is irrelevant because we are not selling one share of any stock. Take a look at the target prices. Remember our most important strategy; grow income.

Since every single stock will have fallen below our target price (between the 52 week high and low) to buy or add shares, as long as you have dry powder (significant cash reserves), the well informed and strongly committed dividend growth investor will probably be buying many if not all of the stocks within this portfolio. You will achieve several goals.

· Owning more shares that will pay us more dividends.

· Increasing the yield on cost from 3.60% to nearly 4.50% based on an equal amount of shares added at this particular pricing level.

· More shares will equate to exponential growth on top of historical dividend increases that is enjoyed by owning these stocks year after year.

· A total cost basis will be lower for each stock, enabling the value of this portfolio to not simply recoup the 30% once the tide has turned, but it will drive higher simply by the virtue of more shares held, at a lower cost basis.

As a result of a steep correction such as the one illustrated here, our annual income will have risen dramatically, which IS our main goal, and the additional cheaper shares will even offer a greater potential for overall total return growth.

The Bottom Line

I always want the market to go higher, especially the stocks I own, but let's be honest; stock markets do correct and we are long overdue for a nice one. When (not if) we are faced with something that looks like what I have illustrated, the most potentially profitable way of looking at the correction is one of joy, not fear.

Investors who are fearful and are not true dividend growth investors will probably sell and perhaps take a loss……even taking a profit at a time like this I would consider a loss. Why? Because our annual income will drop, and when that drops, our entire strategy goes right out the window.

Here is what I do myself; I take some profits when stocks are high, and add more shares when stock prices are low. If I am lucky, I will have added more shares at the low just before the tide changes again, but at a bare minimum, I will be adding shares in each stock at a much lower price for an even more secure financial future.

The moral of this hypothetical illustration is that dividend growth investors need to embrace opportunities, not run away from them. Even if you have no cash reserves, more than likely not one penny of annual income will change, and you will still own every single share of stock.

Our stocks will be ON SALE when the correction hits.

Source: Retirement Strategy: What I Will Do When The Market Corrects