Getting Rich Slowly: An Investment Strategy

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Includes: BEN, CAH, CTAS, CVX, ED, GWW, HCP, HRL, MCD, NUE, SHW, T, TROW, VFC, WMT
by: Gary McMurrin

Summary

A long-term investment strategy suitable for anyone.

You choose between dividend growth, total return, or yield.

Stock selection is limited to the S&P Dividend Aristocrat list.

Many articles, books, and other published materials have been offered to investors over the years suggesting the best method to making your millions in the stock market. Some of them are better than others. Some methods work and some methods don't work. Some of them are designed to make more money for the originator of the strategy than for the investor.

The strategy presented in this article will be presented as a means for any level investor to make money in the stock market, but to make money slowly. Of course, everyone is probably more interested in making money in the stock market quickly, and those strategies are obviously more popular than the strategies that make money slowly, but one must be aware that stock selection, diversity, timing, fees, risk, and luck become critical factors to consider when one chooses their personal investment strategy. Any serious investor must examine these factors carefully before committing their capital to the stock market.

The strategy considers these factors and can be a viable factor for almost any investor, especially the investor who wants to participate in the equity market but may not have the time or the knowledge to create their own strategy. This strategy should also be attractive to investors who don't like to see significant fluctuations in their portfolio during any downturns in the market. The strategy has been tested in real time with real money for more than two years and is now being made available to the investment world.

This article will present the basic concepts involved in sufficient detail for any level investor to implement as part of his investment portfolio.

The basic strategy

The first factor to consider is stock selection. The New York Stock Exchange trades about 2,000 different equity issues and the NASDAQ exchange trades about 3,000 different equity issues. My strategy limits its choice of equities to a select group of companies currently numbering about 54. This group of equities is commonly known as the Standard and Poor's Dividend Aristocrats. Each equity in the group has a track record of not only paying a dividend every year for the past 25 years, but paying a higher dividend each and every year. I don't need to publish a list of the companies in the group because a Google Search will bring up the list in quick order. Most investors will quickly recognize the company names when reviewing the list. My strategy does not recommend any stock that is not part of this group.

One might think that any company that has a record of increasing its dividend every year for 25 or more consecutive years would be a good candidate in which to invest. This is probably a true statement, but I have analyzed the group based on three different factors and, using a proprietary technique, have identified which stocks in the group make the best investments. The three factors are 1) dividend growth rate, 2) total return growth rate, and 3) current dividend.

The second factor to consider is diversity. Mutual funds and ETFs offer plenty of diversity, but maybe too much diversity. The rules that govern mutual funds and ETFs require them to include a large number of issues, maybe more than the individual investor cares to choose. As the fund grows in size, they also must find issues to invest in other than the ones currently in their portfolio. My strategy provides diversity by limiting the number of issues in a chosen portfolio to 5 different equities from 5 different industries. Some investors may not feel this to be sufficient diversity, but when the equities only come from the group of companies described above and must be from different industries, the diversity issue has been addressed.

The third factor to consider is timing. On any given day, there may be a bull for every bear and the balance between the two can change daily. My strategy does not address the topic of timing due to the fact that the chosen group of stocks should perform adequately under any market conditions. There is no question that stocks will rise and fall, but not many people own a crystal ball to tell them when this will happen. My strategy is a buy and hold strategy, suggesting that the stocks in the group are "forever" stocks. The only time to remove a stock from your portfolio is when the company is unable to maintain its record of increasing dividends.

The fourth factor to consider is fees. Mutual funds, ETFs, and investment advisors all charge fees. This is just part of the game. Not many people are willing to work for free. But it behooves any astute investor to give consideration to the fees he is paying for the services rendered. The fees paid by the investor should be less than the fees charged by any other investment strategy. If the investor chooses a good discount broker and follows my strategy, the fees paid can be minimized. If you buy a stock and hold it forever, you are only paying one fee one time.

The fifth factor to consider is risk. This factor must be left up to the individual investor and requires him to evaluate his own risk orientation. Not everyone is suitable to invest in stocks that fluctuate on a daily basis. However, the stocks available to those investors using my strategy have already been pared down to the best of the best. The stocks will have fluctuations, but those fluctuations will be much less than the fluctuations of stocks that are not members of the group. For investors concerned with timing and risk, it is suggested that periods of market downturns be used to add to their current positions.

The last factor to consider is luck. It is a known fact that some people appear to have more luck than others.

Suggested portfolios

Listed below are the companies that make up my strategy portfolios. The stocks are divided into three different groups, with an emphasis placed on which of the factors the investor wishes to emphasize: 1) increasing dividends, 2) total return, and 3) current dividend. Under each of the portfolios is a table to show the annualized historical rates achieved by each of the portfolios.

Growing Dividends

Total Return

Yield

McDonald's Corp. (NYSE:MCD)

V.F. Corp. (NYSE:VFC)

AT&T (NYSE:T)

Franklin Resources (NYSE:BEN)

Sherwin Williams (NYSE:SHW)

HCP, Inc. (NYSE:HCP)

Wal-Mart (NYSE:WMT)

W.W. Grainger (NYSE:GWW)

Chevron (NYSE:CVX)

Cardinal Health (NYSE:CAH)

T. Rowe Price Group (NASDAQ:TROW)

Nucor Corp. (NYSE:NUE)

Cintas Corp. (NASDAQ:CTAS)

Hormel Foods (NYSE:HRL)

Con Edison (NYSE:ED)

Annual Rates of Performance

Growing Dividends Portfolio

Total Return Portfolio

Yield Portfolio

Dividend Growth

22%

11%

8%

Total Return

11%

19%

10%

Yield

2%

1%

4%

Each of the 15 stocks listed above has increased its dividend each year for at least 25 years. From the table you can see that they don't all increase at the same rate due to each company's established payout philosophy. If your orientation is towards having income that keeps up with or beats the effects of inflation, the Growing Dividends portfolio might be the one to choose. If you are looking for growth, the Total Return portfolio may be chosen. And if you are retired or near retirement age and desire a higher level of dividends, the Yield portfolio makes a good choice. Or if you are like me, you might invest in all three portfolios, either equally weighted or not.

Conclusion

This strategy uses high quality stocks with sufficient diversity across the spectrum of industries to be suitable to even the most conservative of equity investors. A typical investor would not need to spend much time monitoring his account because these stocks can be considered as forever stocks. As long as one is comfortable with knowing that next year's dividend will most likely be higher than this year's dividend, what need is there to know that the value of the account may have declined?

Disclosure: The author is long MCD, BEN, WMT, CAH, CTAS, VFC, SHW, GWW, TROW, HRL, T, HCP, CVX, NUE, ED.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.