It was quite clear to us that there was a sell-off in many dividend paying stocks on Friday, with a new focus on growth stocks. The growth areas were led by financials, like Bank of America (BAC) and other large banks, since the Fed has basically given them an unlimited check book to use funds at ridiculously low interest rates, and have a wide enough spread to make money on virtually anything they desire.
The flip side of the Fed actions is that there is now a sense that investing in undervalued growth stocks is more desirable than sitting with dividend paying blue chip "snoozers" as we hold in our "Team Alpha" portfolio. (Review the latest "Team Alpha" article here)
Our portfolio now consists of Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), Annaly Capital (NLY), Southern Company (SO), Procter & Gamble (PG), Intel (INTC), Realty Income (O), Coca-Cola (KO), Bank of America, American Capital Agency (AGNC), Wal-Mart (WMT), Cisco (CSCO), 3M Company (MMM) and Bristol-Myers Squibb (BMY).
For the time being, we could see some further rotation out of these stocks and into some of the growth stocks that have been either shunned, or have been soaring. I personally believe that this will be an opportunity for dividend growth investors to further bolster an already-solid portfolio.
Let's Look At What Happened First
Just on Friday some of our bluest of blue chip dividend winners took it on the chin:
1) JNJ: -$.52/share or .75%
2) T: -$.89/share or 2.33%
3) SO: -$.87/share or 1.89%
4) KO: -$.23/share or .60%
5) WMT: -$.64/share or .85%
6) BMY: -$.47/share or 1.39%
These dips occurred on the heels of yet another solid day in all of the market indices. Does this mean that the stocks are now miserable, rotten, underperformers?
If we clear our minds for a moment, and see what is going on, we can embrace this rotation as an opportunity to add more shares in these stocks. Lower prices, higher yields, and for the long term, more of an income stream for us old folks!
What Could Happen Soon
I believe that the sell-off might continue for a few more weeks. Maybe not even that long. After all, we also face that evil fiscal cliff lurking in the background that plenty of folks think will mean the end of dividend growth investing as we know it.
Here is my scenario; once those growth stocks are bid up to higher valuations, they will become overbought. At the same time, the boring blue chip, mega cap, dividend winners, will become oversold. At that point, there will be another rotation out of those growth stocks right back into the dividend winners. Why? Where else will investors put money to work?
The Fed has said to fixed income investors and savers that they need to be invested. Well the risk profile of most fixed income investors and savers has notoriously been quite low. Dividend investing in the stocks that continue to pay us income is less risky than growth stocks that rely on capital appreciation alone.
As noted in this article, the Fed has "abandoned" savers and retiree's. I do not believe that to be true. I think the Fed is saying; "hey, put that mattress money to work because it will help the economy," or words to that effect anyway.
In the article's very first paragraph, it tells the whole story:
"Stock market investors, bankers and "gold bugs" may well be popping the bubbly after news the Federal Reserve will inject $40 billion a month into the mortgage market for the foreseeable future."
I am not a gold bug, but I am an investor. I think we are in for some really positive gains in the market, including our standard bearers; dividend winning, blue chip stocks.
Actions To Take
As we do already, monitoring our core portfolio is a must and I would take as many opportunities to add to our core during this rotation phase as possible.
I would look at increasing holdings of JNJ, T, KO, and WMT almost immediately (it is okay to wait a few more days I think), and I would consider expanding the core portfolios with some judiciously chosen growth stocks. Perhaps another bank stock like Citigroup (C) with a position of no more than 5%.
By having Bank of America and Citi as our two big bank financial stocks, we can cover plenty of other sectors (like housing for example) with our positions in both.
As noted in this article:
"While none of the 10 industry groups in the S&P closed in the red, the financial sector was one of the biggest gainers. The Financial Select Sector SPDR (ETF) jumped 2.7% and stocks including American Express Company (NYSE: AXP), Bank of America Corp (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C) and Morgan Stanley (NYSE: MS) surged 3.1%, 4.8%, 3.7%, 4.2% and 2.8%, respectively."
Opportunities are within reach. I believe we can strengthen our "Team Alpha" portfolio by taking advantage of the dips in our stocks.
After all, isn't that how we began this journey in the first place? (Check this out)