The current panic we've been experiencing has been based on the fears of the unknown; how would China's economic contraction and market plunge affect the global and domestic economy and markets.
China's market has plunged into bear territory three times in the last several months, and each time, including last August, our markets corrected then rebounded after that. This time will be no different.
The unknown fears also include the uncertainty surrounding the collapse in oil prices. When investors begin to fully appreciate the beneficial effect lower oil prices have on an economy that is 70% consumer-based the fear and uncertainty will begin to melt away and transition to the next buying panic.
Even with the loss of 132,000 jobs over the past year in the oil patch, jobs are increasing now in the overall economy at the rate of 300,000 per month, or 3.6 million on an annual basis. This negates the oil patch related losses by a wide margin of almost thirty to one. Of course, our hearts go out to the workers who have lost their jobs, but the fact remains, the overall economy is adding a solid amount of jobs.
There is so much oil related product throughout our economy that the beneficial effects of a severely depressed commodity such as oil cannot help to filter through to the bottom line of most companies that use this raw material.
Let Me Count The Ways
1. Oil refineries profit from the lower cost of their raw product before it is refined into a multitude of fuels.
2. Airlines benefit from the lower cost of jet fuel to power their planes. Passengers benefit from lower fares.
3. Plane manufacturers see sales rise to airlines that have freed up cash flow due to their lower costs.
4. Auto manufacturers see sales rise to consumers less impacted by formerly high gasoline prices.
5. Utilities running on severely depressed oil and natural gas prices fatten their bottom line with cheap fuel and feel less pressure to pass on fuel costs to consumers, freeing up additional consumer buying power.
6. Paint producers see their costs decrease; consumers can more cheaply paint and remodel their homes.
7. Plastics manufacturers and all producers of commercial and consumer products made from plastic benefit from the lower cost for all their products. Profits increase and consumers gain additional wallet power, freeing up spending for other items. Remember the movie, "The Graduate"? Plastics, plastics, plastics.
8. Consumers take upwards of 40% of their meals outside the home, eating out at restaurants and fast food joints. Consumers feeling more flush from all their freed-up energy savings will spend more, and will eat out more frequently.
ZIRP Plays Its Role
Historically low interest rates continue to grease the wheels of the economy. In a plastic card addicted consumer society, all things consumers buy, from the lowliest household item, to the shiny new car to the dream house are all cheaper and easier to buy and finance, further fueling the consumer's ability to spend and add growth to the economy.
Once these ideas begin to percolate in investor's minds and they begin to see these beneficial effects filtering into the economy, an even more powerful fear will begin to grip these investors.
The Fear Of Being Left Behind
No child left behind. This became a national mantra as the country focused its energy on the many children that seemed to be passed over, neglected in the race to educational proficiency.
The fear of missing out, missing the boat, missing out on the next great opportunity in the stock market can be just as powerful as the flight to safety and fear of collapse that has investors in its grip since the New Year began.
The first fear was based on fear of the unknown, fear of loss. The next fear we'll encounter will be fear of losing out.
Once investors buy stock, they are loathe to see its price decline. They're constantly frightened that their hard earned money is being lost and may disappear completely. Instead of viewing stocks on sale the same way they do their favorite designer shoe on sale, instead of rushing to buy more stock like they would the shoe, they look for the closest exit. It's always shoot first and ask questions later.
Shooting First Is Just Too Easy Today
There was a time, before the internet (Millennials will have a hard time conceptualizing this) when we learned of closing stock prices in some late edition newspapers several hours after the close of trading.
Those who did not subscribe to late editions usually learned how their stocks performed the previous day by reading the morning business section the next day, fully 15 or so hours later.
More active investors might have called, or received a call from, their brokers at some time during the day, usually around the close or after and learned of the day's market activity in that fashion, on their old-timey landline phones.
Instant, All Day, Streaming Quotes
Well, contrast those earlier days of communications and it's almost mind numbing in comparison to today's always-on, all day long streaming of stock quotes. The instantaneous access that our internet connected computers affords us, over high speed fiber optic cables keeps many of us too much in touch.
As if talking heads on CNBC, Bloomberg News and all the rest weren't enough to rattle our brains all day, we have instant bombardment of stock prices occasioned by our desktop computers, laptops, notebooks, tablets, hybrid laptop/tablets and now our mobile phones, streaming in real time.
We are tethered and connected and impacted by all things financial and stock market related, all day, every day, always on (except for proscribed holidays that are forced upon us by the authorities. Thank you Martin Luther King).
The effect of all this is that, like it or not, our brains are constantly fixated on prices in the markets. And when fear takes hold of the masses it is very hard to shut off. It is also very hard for most folks to ignore. If everyone is fearful and panicking, "they must know something that I don't." This is how the fear spreads and takes hold of everyone.
The Fear Of Missing Out-Greed
It was Warren Buffet who said it so eloquently. "Be fearful when others are greedy. Be greedy when others are fearful."
The most efficient way to profit from this sage's advice is to position your portfolio and your mind to react opposite to the crowd when high emotion is determining movement in the stock market.
No one would seriously doubt that emotion has taken over most investors' minds at this point. They are falling over themselves to lighten their positions in fear that not doing so will lead to larger losses. They miss the forest for the trees. Being price focused can do this to you.
A Different Perspective
Dividend growth investors' focus on price is mainly one directional. Because dividend investors are focused like a laser on growing their income, their only occasion to focus on price is when they are concerned about the entry price they will pay. What's the cost of admission?
Being value based investors, dividend investors are interested in getting the best possible price when they buy. A good, fair value price will inure to their benefit in several ways:
1. Paying a lower price will confer some cushion, some downside protection. A margin of safety will be built into a value price paid.
2. A lower price paid will confer a higher dividend yield, for life. The yield obtained will be locked in and never affected by future price movement. His original yield is his and no one can take that away (unless the board reduces the dividend amount)
3. The higher yield occasioned by that lower stock price will have the result of giving the investor higher income, for life. Again, barring any miscreant dividend cut, this higher income belongs to the investor, regardless of any stock price movement, up or down.
4. A lower entry price affords the investor the ability to buy a larger number of shares which translates again into higher income.
5. A reinvestment of dividends into a lower stock price has the effect, again, of buying more shares at cheaper prices, again increasing and growing the investor's income. We refer to this as compounding the income.
Since dividends represent about 70% of the ultimate long term returns in the stock market, it becomes clear that buying at lower prices and compounding those dividends become a very powerful, compelling force for creating wealth and income.
Portfolio Income Tracking: How I Keep My Focus
The table below is an example (actual numbers are not accurate, just for demonstration) of how I keep my focus on the dividends generated in my portfolios. This spreadsheet allows me to list all of my portfolio holdings, enter shares purchased, price paid, amounts invested, and dividend amounts. After that, annual dividends to be received are figured automatically, as well as all totals. When dividends are increased I simply open the spreadsheet and update the new amounts and the spreadsheet automatically calculates all the resulting sums for me. I make this type of spreadsheet available to all my subscribers.
If you are not a subscriber and would enjoy the convenience of using this spreadsheet to enter your own stocks, share amounts, dividends, etc. so you can easily track your income, please send me a direct message requesting it. I'm making it available to readers and followers for a very nominal amount.
Different Strokes For Different Folks
Many pundits have been pontificating for some time that the ZIRP environment has sent retirees and near retirees chasing yield, trying to replace income from secure, FDIC insured CDs that is no longer possible to obtain at near zero interest rates. They go a step further and warn that these very same investors will rue the day they took their money out of these safe investment vehicles when the market begins dumping interest sensitive stocks like the many REITs and business development companies many of us own for their reliable streams of income.
I would posit that it is these very same investors who gravitated to these securities that will be among the first to pivot from the current fear to the near-future greed. This spectrum, from fear to greed will again reveal itself and resolve back to greed when investors begin to acknowledge the positives that are ongoing in our economy.
The marked slowdown in the Chinese economy is having no effect on the hiring by employers in the U.S. Demand is expanding slowly but surely and creating higher demand for workers to fulfill that demand.
Cheaper oil will come to be seen for the great positive it is for the overall economy. Consumer sentiment is still strong and that will continue to be reflected in expanded consumer spending.
Domestic car companies are selling a record amount of autos only a few years after most were bailed out of certain approaching and real bankruptcy. This is not the picture of an approaching recession. Bear markets in America only occur in recessionary environments.
This approaching pivot from fear to greed can occur in a flash. A few good earnings reports this season can salve the wounds and reinvigorate investor's confidence. A surprising home builders report, in the midst of the usual winter slowdown, could turn sentiment around on a dime. A report of an increase in exports, even in the face of a rising dollar, could turn things around quickly.
It only takes a little spark to light up investor's light bulbs and throw some positive light upon all the gloom. The fear of missing out on the rebound from this correction can be just as powerful, if not more so, than the fear currently gripping the world. Greed is a very powerful emotion.
No one wants to be left behind when the train begins pulling out of the station.
In my previous article, "Attention Income Shoppers: Dividends Are On Sale, Shop Till You Drop", I discussed the large and developing opportunities that a dividend investor could capture if they would consider layering in to positions, a bit at a time.
The higher dividend yields are becoming apparent now and the ability to build income at a quicker rate has come center stage.
Main Street Capital Fits The Bill For Dollar Cost Averaging
We recently bought additional shares in Main Street Capital, on sale. We bought them at nearly 10% off our original purchase price for our subscriber portfolio, filling out this core position to about 65% of total capital we expect to allocate to this position. We are holding dry powder so that if we see an additional 10% sale we may commit to buying more shares at that point in order to dollar cost average our position and obtain higher yield and higher income.
Main is currently down almost 18% from its 52 week high. Should it fall an additional 10% with general market weakness to around $24.55, its $2.16 annual dividend will supply a very generous 8.8% dividend yield. If you add in the two $.275 extra dividends this company has paid since 2013, the realized dividend totals $2.71, for a current yield of 9.93%. Should we capture more stock at the $24.55 price level, the total yield, including the extras, will translate to 11%.
Business summary, courtesy of Yahoo Finance
Main Street Capital Corporation is a business development company specializing in long- term equity and debt investments in small and lower middle market companies. The firm focuses on investments in, subordinated loans, private equity, venture debt, mezzanine investments, mature, mid venture, industry consolidation, later stage, late venture, emerging growth, management buyouts, change of control transactions, ownership transitions, recapitalizations, strategic acquisitions, refinancing, business expansion capital, growth financings, family estate planning, and other growth initiatives primarily for later stage businesses.
From the company's 3rd quarter, 2015 presentation:
Main is an internally managed business development company that takes a hybrid approach, investing in debt and equity.
Main's investments in Lower Middle Market companies provide the opportunity for significant net asset value growth. The company's dividends have been covered by distributable net investment income (it charges interest in the range of 12% to 14%), and net realized gains.
Since its IPO in 2007, Main has presented a picture for today's sore eyes. It is one of sustainable dividend growth. In 2013 it began to pay supplemental dividends, and in the fourth quarter of 2008 it began to pay monthly dividends instead of quarterly, putting frequent cash flow into the hands of shareholders.
This gives you a breakdown of where their portfolio is invested. Spread over 200 companies in widely diverse geographic areas, most of Main's investments make up no more than 1% of the total portfolio, or an average of $8.4 million invested in each. This diversity in geography as well as industry sector gives investors wide exposure as well as mitigation of risk to any one sector. Keeping investments controlled at 1% exposure also goes a long way to mitigate risk to any one investment.
For those investors concerned about energy exposure and how it might impact this business development company, the share of Main's investments devoted to energy, equipment and services amounts to a manageable 7%.
The general sell-off in BDCs due to the oil exposure worry is what presents the extra opportunity in Main. Like the baby thrown out with the bath water, Main's price has suffered along with the group, yet their exposure to the danger that investors are concerned about is very slight and manageable.
Since IPO in 2007, Main has grown portfolio investments on a per share basis by 216%. It has commensurately grown distributable net investment income per share by 205%. This close alignment is a good indication that costs at this company are being held in check and shareholders are benefiting right in line with the company's progress.
As for the anxiety investors have regarding the threat that rising interest rates pose to the BDC sector, it is instructive to see that Main, among others, has this concern covered, too.
Due to Main's capital structure, they stand to benefit greatly as rates rise. Their cost of funds is much lower than the rising interest their investments will pay as rates rise, beginning with a 150 basis point rise (100 basis points equals 1%).
Net investment income and net investment income per share grow exponentially with any rise of rates from there. It is this higher NII that will provide higher dividends per share in the future.
Main's P/E ratio is a low 11, compared to its industry average of 15 and the S&P 500 P/E of 19. This provides some margin of safety with this investment. According to Morningstar, forward valuation has Main at an 11.1 P/E and the S&P 500 at a forward P/E of 17.2. This leaves a lot of room for Main to play catch-up with its sector and for its price to appreciate.
Its 5 year average dividend yield is 6.6%. Today, the dividend is yielding 7.9%. This is an indication of yet another margin of safety. When the stock reverts back to its average yield, the price will necessarily trend higher (price and yield work inversely with each other).
Discipline Wins The Day
In the end, discipline will always win out over conviction, because those with negative conviction would have sold everything on Wednesday last week, right before Thursday's phenomenal rebound.
Those with the discipline to start buying now will reap the rewards of lower prices, higher yield and higher income before the gathering rebound that will ultimately have the majority of investors kicking themselves, as they always do, for missing out on the ensuing rally.
Instead of working hard for money all our lives, we keep our money working hard for us when dividends are on sale.
Assets like dividend paying stocks put money into our pockets. Buying cash flow now at cheaper prices will keep that higher amount of cash flowing and building wealth for us.
Make this New Year a year of acquiring this type of income-generating asset. Dividend paying stock-the asset that keeps on giving.
The FTG Portfolio
I began writing a series of articles on December 24, 2014, to demonstrate the real live construction and management of a portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near retirees face today.
The beginning article was entitled, "This Is Not Your Father's Retirement Plan." This project began with $411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.
Having reduced our risk to portfolio income by spreading our income equally among many separate high-quality companies with long histories of paying and increasing their payouts, we built out the foundation further. Additional strength was derived from diversifying to several sectors to mitigate our risk.
The Fill-The-Gap Portfolio, or FTG, was born of the realization that the average American couple can expect to receive $28,800 in Social Security benefits that they worked their whole careers to earn. We also understand that a fairly comfortable retirement in most parts of the U.S. is going to cost us around $50,000.
If we simply subtract the smaller amount from the larger required amount, we come to see that this average couple is short of a couple of tens of thousands - $21,200 to be exact.
Where Has The FTG Portfolio Sought Income In Past Months?
I'm glad you asked. Readers of my series have been following the progress of my Fill-The-Gap Portfolio, which I have been demonstrating exclusively for readers of Seeking Alpha since the inception of the portfolio on December 24, 2014.
Its aim is to illustrate how an average retired couple receiving an average of $28,800 in combined Social Security can close the gap between that amount and a fairly comfortable $50,000 retirement income. If we add this $28,800 average from Social Security to the current $25,359.69 in FTG Portfolio dividend income, we see that the current annual total of $54,160 comfortably surpasses that initial goal and continues to increase through growth of dividends and opportunistic reinvestment of those dividends.
Portfolio Construction And Management 101
I have recently launched my premium subscription service right here on Seeking Alpha. For those readers who have not yet joined, it's a service of active portfolio management that will help you build an exclusive dividend growth portfolio for your retirement. Please click the banner at the bottom of this article to learn more about my premium subscription service.
This new portfolio began with a starting overall portfolio dividend yield of 5.77%.
The FTG Portfolio
Constructed beginning on 12/24/14, this portfolio now consists of 17 companies, including AT&T, Inc. (NYSE:T), Altria Group, Inc., (NYSE:MO), Consolidated Edison, Inc. (NYSE:ED), Verizon Communications, Inc. (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital Corporation (NYSE:MAIN), Ares Capital Corporation (NASDAQ:ARCC), Reynolds American, Inc. (NYSE:RAI), Vector Group Ltd. (NYSE:VGR), EPR Properties (NYSE:EPR), Realty Income Corporation (NYSE:O), Sun Communities, Inc. (NYSE:SUI), Omega Healthcare Investors (NYSE:OHI), StoneMor Partners LP (NYSE:STON), W.P. Carey, Inc. (NYSE:WPC), Government Properties Income Trust (NYSE:GOV), and The GEO Group (NYSE:GEO).
Plan of Action-Portfolio Management
Our aim is to get the most bang for our bucks. We will look toward any further weakening in the markets as our developing opportunities to buy more income for the portfolio at cheaper prices, gaining higher yield along the way.
We are in no hurry here. We will follow our playbook just as we did with the recent Vector Group and Main Street Capital purchase. We'll pick our spots, and when those entry points arrive, we'll pounce.
Capital Preservation, Capital Growth And Dividend Growth
We are happily meeting all of our objectives, preserving our capital, growing it strongly and collecting 103 separate dividend payments every year. All of this is being accomplished while the rest of the market and most investors are struggling and flailing around, unsure of whether they should stay or should they go.
We stick to our plan to grow our income. Some investors now find themselves gravitating to the kinds of stocks we've bought because they offer some safety, some downside cushion and growth of income by reason of their paying us dividends. That is what has contributed to some of our capital gains to date.
The Fill-The-Gap Portfolio for 2016 presents a new beginning, an opportunity for retirees, near-retirees and new, younger millennial investors to start the process of making their transition to dividend growth investing in some of the safest, most predictable, long-paying, high-payout companies in America.
For younger millennial investors willing to be open to ideas to further their financial education, this portfolio represents a solid foundation. For them, and all pre-retirees and retirees, this model of portfolio construction is offered as a foundational way to build retirement income for the future that addresses inflation head on. The dividends in this portfolio will continue to grow in such a way that future income will not be degraded and decimated by inflation. On the contrary, purchasing power will be preserved, unlike what would befall an investor buying 0% T-bills today or negative interest rate T-bills next week as discussed in those articles I penned.
If you accept the premise that the equity markets will eventually bounce back from this correction (we saw this in September, again on Wednesday, December 23, 2015, with the powerful rebound from the summer correction and again last Thursday), you may wish to consider some of the equities discussed here for your income portfolio needs. Now that many of them have suffered a good degree of price compression, their yields for new investors, as demonstrated, are accidentally high and that much more attractive today. The research presented today should lend some degree of comfort as well since this is the bottom line for income investors - sustainable and growing income.
If we can maintain discipline to shut out external world event noise and stick to our plan of growing the income stream, no amount of external events will impact our income component. If we allow ourselves to let in just a portion of the noise and be on the lookout for opportunities that pop up, we can profit from these opportunities by buying on the dips and corrections as we've done and demonstrated here. We need to filter out extraneous cues and simply profit from all the confusion around us.
Author's note: Please consider following me in real time. This will enable you to receive an email the moment any of my articles are published on Seeking Alpha. Just click the down-arrow next to the "Follow" link above this article title, and check the boxes for "Follow this author" and "Real-time alerts on this author."
Please don't keep me a secret. I'd appreciate it if you forwarded this article to your friends, colleagues and family who you think might find this work interesting and something they might benefit from.
If you found this article, the concept and investment results interesting and intriguing, I invite you to read the other articles in this series. Stay tuned for further articles that will introduce additional sectors and names to further diversify a portfolio for continued ballast and mitigation of risks to any one sector.
Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.
As always, I look forward to your comments, discussion and questions.
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am/we are long ARCC, CTL, ED, EPR, GEO, GOV, MO, O, OHI, RAI, STON, SUI, T, VGR, VZ, WPC.
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.