My Strategy For Market Fear And Panic

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Includes: AMGN, BDX, CL, CVS, FAST, HSY, JNJ, MCO, NKE, PEP, PG, SBUX, VZ
by: Integrator

Summary

Markets have been highly volatile over the last week, with the suggestion of more falls to come.

I've never been more convinced in a strategy of regular high quality dividend accumulation to drown out the noise.

While markets may fluctuate, quality businesses continue to generate sales, income and growing dividend income.

I've been watching the panic in the stock markets over the last week or so with a mixture of surprise and interest. While the declines have been steep, it hasn't even occurred to me to too reconsider my investment strategy of steady, long term dividend accumulation. I believe that there are a number of reasons why this is the case.

Accumulation of high quality dividend paying businesses

My strategy is buying best of breed businesses that pay dividends. I do this regularly and consistently, every quarter, irrespective of stock price points. At times, it results it paying prices that seem high. At other times, it results in picking up stocks at bargain prices. While it's difficult to tell at the time whether a business is really priced at "bargain basement" or not, I've picked businesses that I know will be long term creators of business value. Thus I'm able to buy businesses that I know will be more valuable in 20 or 30 years when I finish my accumulation.

The interesting thing about this latest decline is that nothing has changed as far as my core businesses are concerned. Starbucks (NASDAQ:SBUX) has continued to sell coffee over the last few days without interruption. Consumers have still been buying chocolate from Hershey (NYSE:HSY), (possibly even at a higher rate to relieve some of their market tension!). Johnson & Johnson (NYSE:JNJ) and Amgen (NASDAQ:AMGN) have continued treating various consumer ailments with the specialty drugs, distributed courtesy of top quality retailers such as CVS (NYSE:CVS).

This regular, steady accumulation has been important to me because it helps ignore the noise and eliminate some of the distractions. I've selected stocks that I believe have significant competitive advantages that lend themselves to an enduring moat that will be difficult to breach. All of my "30 for 30" (30 stocks for 30 years) have solid rates of return on invested capital, and rates of return on equity that are generally 15% or greater.

Lower beta

The overall beta of my Dividend Growth Accumulation Fund is 0.83, which is less than the market overall. While my portfolio has a number of high growth stars that have delivered strong total return and tend to be more volatile, I've been very careful to balance this out with steady, high yield dividend payers that not only add stable dividend income, but also make the overall portfolio less volatile than the market.

Verizon (NYSE:VZ) and Procter & Gamble (NYSE:PG) may be considered market laggards in terms of total return, but they juice my portfolio returns with high dividend yield that can steadily reinvested back into the portfolio. In addition to solid yield, these businesses provide my portfolio with lower beta. At a beta of 0.66 Verizon moves much less than the general market, and helps offset the more volatile movements in my portfolio with companies such as Moody's (NYSE:MCO) and Amgen (AMGN) which have market beta's of close to 1.2, significantly more volatile than the market.

Investing for income

At the end of the day, I'm focused on a tangible, growing, long term income stream. Having this goal in mind is helpful, because while the last few days have resulted in share price declines, my dividend income from my businesses hasn't changed. In fact even if stock prices continue their downward plunge, I have a high level of confidence that there won't be any impacts on the dividend income from my positions. The businesses that I own largely continued paying their dividends, even during the midst of the worst recession and share market declines of 2008/2009. In fact, many of the businesses that I own have long, unbroken records of dividend payments. Johnson and Johnson for instance has paid an increasing dividend for the last 52 years, Pepsi (NYSE:PEP) has managed to increase dividends for the last 27 years and Colgate Palmolive (NYSE:CL) has increased dividends for over 41 years.

Long term total returns

While the day to day, week to week and month to month total returns of my portfolio will no doubt fluctuate, I've got belief that the businesses I hold will generate solid long term returns. If you look at the long term performance of some of these businesses, they have comfortably outperformed the S&P 500.

Now I'm not just talking about some of the flashier portfolio components, like Starbucks , which has returned over which has returned just under 25% annually since 1992, or Nike (NYSE:NKE) which has returned over 18% annually since 1980. There are also a number of quiet, understated stars that are steady accumulators of long run total return. Businesses like Colgate , which has generated close to 16% annual returns since 1980 just by selling toothpaste. Fastenal, (NASDAQ:FAST) which manages the shipment of industrial fasteners for merchants has generated a solid 18% return annually since 1990. Even Becton Dickinson (NYSE:BDX) which is in the "boring business" or providing surgical supplies such as needles, has managed to generate returns of close to 14% annually since 1990.

In the year that I have been pursuing this strategy, the portfolio has handily outperformed the S&P500 by close to 3.5%. Of course, a year is meaningless in the context of long term portfolio returns, and I don't expect to outperform the S&P 500 every year, but it suggests to me that I have a set of top quality stocks that should be capable of delivering long term returns under all conditions.

My portfolio strategy has helped me tune out the noise of the last week, focus on consistency and look forward to steady dividend income and strong long term total returns. While there will be no doubt be ups and downs along the way, investors would be well advised to keep their eyes on the long term prize.

At times like this, it's useful to remember that core portfolios contain businesses that have been generating sales growth, income and dividends over many years, with solid long term investor returns to go along with this. These things don't disappear overnight, no matter what sharp downward market movements may suggest.

So what's my plan in light of the last week ? I'm staying the course with quarterly long term accumulation of my 30 high quality, dividend paying businesses.

Disclosure: I am/we are long SBUX, JNJ, VZ, HSY, AMGN, CVS, FAST, BDX, PEP, PG, CL.

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.