So if you've got your monthly budget in place, I hope you've got a part of that budget stocking away cash into a savings account.
My financial budget requires me to have atleast six months of living expenses stashed away as cash in an emergency fund and another two to three months of cash in my checking account for occasional one time expenses (such as lump sum insurance payments, an unexpected expensive car maintenance service, charity, gifts, living expenses etc). When you have a family, you want to be prepared.
And then there's the cash you stock away so you can buy stocks of great companies when the market takes a dive and brings these companies crashing down again. My financial budget plans to look at investments in five year cycles. So I plan to hold cash for investing with expectations of significant market downturns during these cycles. Hence, it is always a good idea to have lots of cash (dry powder!) ready to deploy. As I've adopted the dividend reinvestment model, the stocks I buy will pay cash and that cash will be reinvested to buy stocks again. We're trying to create a viscous cycle here if you know what I mean.
Buying companies that have dividend growth also give you a poor man's mechanism for "taking profits" without selling shares.
After the S&P500 crossed 1700, the last few days have given us a pull back with significant macro economic indicators such as Walmart's earnings miss, poor guidance, Cisco's challenging outlook and layoffs and then the Fed reminding us that QE to infinity and beyond is QE to finite and probably a little bit less in September and beyond.
Suddenly it's all gloom and doom among the talking heads. CNBC's Jim Cramer claims there is a disconnect between the economy improving and corporate earnings reflecting the opposite. Well, ummm, hey! shouldn't it be the other way round? corporate earnings, layoffs and guidance as an indicator to how the economy is doing?
oh well, whatever. Don't let common sense getting in the way of TV ratings.
So after we've had quite the run up from the start of the year, I'm hoping for some market mayhem for the next two months... or what everyone else calls a correction. Anything beyond a 10% to 15% correction may be a clue that we might be in the start of a bear market (short term, long term I don't know). So 1550 is a very pivotal point for me. Looking at the chart and coinciding with all the bad news, maybe we can expect a fruther down move below 1600? that's just my hunch and there's no PHd thesis behind it. Besides, we're in the part of the year that usually sees a blood bath.
In lui of this, I'm building a cash position from my income and preparing to deploy in small parts. Thanks to the market dips this week, I started small positions in the Coca Cola Company (NYSE:KO) and Walgreens (WAG)... two stocks that I've been reading about for the last couple of days and weeks. I deployed around 20% of my intended cash for each purchase intended for the next two years.
New positions started in August: KO, WAG
- Coca Cola company KO: No need to introduce Coca Cola to anyone. This is a market leader in the beverage industry. Adding KO to my portfolio is more of a defensive add considering low growth, low beta (.49), friendly shareholder programs such as stock buy backs and dividend increases. Current dividend yield is 2.87%
- Walgreen company WAG: As part of my investment strategy to be overweight in companies that people will always need - energy, consumer staples and healthcare, Walgreen is in the retail pharmacy business and therefore fits my need for being exposed to healthcare. It is a dividend aristocrat for good reason too: it has paid uninterrupted dividends for the last 80 years since 1937 and has increased dividends for the last 38 years. That's an impressive record if you ask me. The company has been increasing its earnings per share (NYSEARCA:EPS) every year compelling me add this to my portfolio.
Future Positions I'm intending to start within the next two months: CVS
- CVS Caremark Corporation CVS: Like Walgreens, operates in the retail pharmacy segment. I've been looking at CVS and Walgreens and feel compelled to have a good position in both. The company has increased dividend payments for 10 years in a row. Though the yield is low at 1.5%, yet I look at CVS as adding to the growth component of my portfolio. I intend to buy around 30% of my intended target for the next three years within the next two months. Since I already spent cash on stocks with respect to the quota I had in mind for August, I will deploy only after August. I'm hoping that the price would drop to 55 to 56 bucks a share by then. Hence, praying for some market mayhem.
- Visa Inc. (NYSE:V): This was brought to my attention by fellow SA member Tyler. I started reading articles on seeking alpha from different authors to learn more about how its business is doing. Visa stock has been on an upward trajectory and I was surprised to note that it didn't dip like all other stocks during the October correction last year. I will still need to do some fundamental analysis on this company and also study the regulatory environment that companies like Visa operate under. Visa has a strong moat in its space. It was recently struck with a court decision against it and other payment companies like Master Card with regards to charges. The stock is around ~10% off it's highs. Again, like CVS, I'm not looking at Visa for the dividend but to add some growth potential to my portfolio. The company became public with a dividend in 2008 and has grown the dividend ever since. Though it yields a meager .80% right now, my prediction is that since there is a lot of space for dividend growth considering a low payout ratio, investors will look at Visa as a dividend growth stock within a few years.
- McDonalds MCD: McDonalds is one of my favorite long term stocks and even though its got some bearish reviews since last year, I bought the stock when it took a downward slope from its high 90s to low 80s last year in November. It's performed well since then and faces resistance above 100 and keeps wobbling around that zone. I bought around 40% of my intended five year long term position already and am wondering if I should consider adding to this position around 10% to 20% of my intended long term target of my intended position. $95/share seems to be some sort of support line and many analysts see any moves below 95$ as indicator that it could drop to the high 80s after that. I'm looking to add to MCD below 95. September will once again be when I will take a good look at adding to this position.
- Disney DIS: Disney is one of my favorite growth stocks with a bonus of a dividend. I believe that there is still a lot of room for growth for this industry leader though as usual, I'm always apprehensive about buying a stock close to its highs (yeah, I know that's not a valid excuse if you are long but I have a physiological problem). Seeing the stock hovering in the 62 range below its high 67s share price, I'm wondering whether now is a good time to add 10% to my existing 30% of my intended five year target in Disney. Remember, Disney still has a lot of potential to exploit the Avengers franchise, Starwars franchise and also Disney cruises along with opening and growing its theme parks in emerging markets.
- Walmart WMT: Walmart became attractive again thanks to a bad quarter and retail woes. Remember, this is a dividend aristocrat and a good defensive stock. It's a very shareholder friendly company. I have one of my largest positions in Walmart (around 7.5%). I'm looking to add within the next three months around 10% if it goes below 70.
- Target TGT: Another retail champ that's a dividend aristocrat. I'm have a small position in TGT already - around 30% of my intended long term target. If the stock goes below 75/share, I will add around 10% to 20% of my intended long term target. I think there is a lot potential for target to expand overseas and also have a strong retail presence locally.
So that's what I have in mind for manic mayhem in the stock market. How are you guys looking forward to some market meltdown? Apprehensive or do you plan to buy or add to some stocks that you've been eyeing?
Well, that's it for now. Until next time, happy investing!