The stock market has had a pretty lousy month. Q1 2016 earnings season has been awful, and the market is beginning to react accordingly.
The Dow (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) have formed triple tops, and the NASDAQ (NASDAQ:QQQ) looks like it's about to fall off of a cliff. I certainly do not have much confidence in this market, and there are very few, if any, value plays in sight. Currently trading at a P/E ratio of 23.7x, even going ultra-long in the S&P 500 at these prices forecasts mediocre returns at best. There are just too many uncertainties - with a weak-kneed Fed that refuses to make the tough decisions for our long-term benefit because they're too chicken to face a short-term correction, a national debt swelling out of control, an election cycle that should fill the Monday 8:00PM timeslot on Bravo, volatile commodities prices and the entire retail industry experiencing death throes, what is an investor to do?
I believe it is only a matter of time until the broader markets experience a major correction, and the retail, energy, utilities and financials sectors that make up so much of the market indices are ticking time bombs, exposing today's cash to too much risk for too little potential reward. As an investor, I am trying to strip away some of the risk by focusing on the more promising niches of the economy.
Back in December 2015, The Bureau of Labor Statistics published a very useful chart titled "Industries with the Fastest Growing and Most Rapidly Declining Wage and Salary Employment." No surprise here, the Manufacturing industries are expected to decline the most rapidly, while the Healthcare and Social Assistance industries are projected to grow the most rapidly.
Using DRIPs and DSPPs to Mitigate Risk
I have written extensively on the benefits of Dividend Re-Investment Plans [DRIPs] and Direct Stock Purchase Plans [DSPPs] in the past. I am a huge fan of them for several reasons:
- "Valuation" is taken out of the equation. As long as you set your contributions on auto-pilot and allow the plan to do its job, you will be given a new buy-in point every single month for a total of 12 purchase points each year. You will purchase the stock at low prices, high prices and everything in between. Over the years - hopefully decades - you will have purchased the stock at nearly perfect fair value - there will be so many purchase points, the mean average will be a true best-fit line. This eliminates the potential landmine of buying an overvalued stock, and while you will be limited to market returns, history has shown time and time again that market returns can make an investor exceedingly wealthy if time is on their side.
- Auto-contributions. You can set the plan to deduct a predetermined dollar amount (minimums vary per plan) from your checking or savings account every month on a predetermined day. In investing, often we are our own worst enemy. We become fearful when markets decline, when in reality that is often the best time to buy. Auto-contributions allow the investor to "fall asleep behind the wheel." The money will be silently deducted from your checking or savings account every month, rain or shine. Over time, you will build an advantageous cost position through the miracle of dollar cost averaging, as outlined in point #1.
- Reinvested dividends. You can set the plans to auto-reinvest dividends into shiny new stock. Time has shown again and again that the secret to long-term compounding success is through the power of reinvested dividends. If you build a substantial position into retirement, you can simply switch the auto-reinvestment option off to pay you the full dividend every quarter for income during retirement, or even some mix in between. This is currently my plan for my retirement - I intend to live off of dividend income without selling my principal, which I hope to one day pass onto my future grandchildren in some type of trust.
- Many plans have low fee schedules, especially when compared to traditional brokerage houses (some plans have more fees than others -- individual plans may vary).
I have already attempted to cover my bases in the growing healthcare industry by DRIPing every month into what I believe to be the greatest healthcare company on the face of the Earth - Johnson & Johnson (NYSE:JNJ). To date, it has performed very well, and even though I believe the stock is currently a bit overvalued at present, I refuse to abandon my contributions and will stick to my plan. Long means LONG, folks.
Look For The Bare Necessities, The Simple Bare Necessities
I believe there are two sectors that are impervious to any market condition in the long-term view:
Why? Because no matter how bad things get, people will NOT abandon their medication and their meals. They will sell anything else beforehand - their house, their car, even the shirt off their back - because even a roof over your head is optional. You need food and your medication to survive.
These are also sectors that cannot be destroyed by change. Oil could be killed off by renewables and electric cars - in 50 years we could all be driving Teslas (NASDAQ:TSLA). The Apple iPhone (NASDAQ:AAPL) could become obsolete in a decade. Amazon.com (NASDAQ:AMZN) could be toppled by another online retail giant that finds a way to make it even easier to shop from home in your underwear. Kroger (NYSE:KR) could be put out of business by an Amazon-like grocery retailer that makes it possible to shop for groceries from home with same-day delivery out of an absurdly efficient distribution center. But the one thing that will never change is we will need to eat food and take medications. These things will always exist as long as we remain human.
Enter General Mills, Inc.
General Mills, Inc. (NYSE:GIS) is as close to the perfect DSPP one can imagine.
1. The industry is impervious. Human beings will always need food. Period.
2. General Mills has a very wide moat. General Mills owns some of the most notable brands you'll find in any supermarket.
- Betty Crocker
- Cinnamon Toast Crunch
- Fiber One
- Fruit Roll-ups
- Gold Medal
- Green Giant
- Hamburger Helper
- Lucky Charms
- Macaroni Grill
- Nature Valley
- Old El Paso
These are just some of the brands in General Mill's portfolio. It would be a challenge to find a single American household without one of these products in it.
3. General Mills has an impressive dividend history.
General Mills has paid a dividend, uninterrupted, since 1899, and has raised its dividend YoY since 2003. The stock currently yields 2.85%.
4. The fee schedule is outstanding.
General Mill's Direct Stock Purchase Plan has one of the best fee schedules I've seen. The only fee applicable to a planholder is the initial opening fee, which can be avoided if you are a current shareholder of record. For example, if you hold General Mills stock in a private brokerage account, simply fill out transfer paperwork to have one single share transferred out of your broker's name and have it registered under your social security number - fee avoided. Individual brokerage houses may vary with how to complete this, but a simple phone call to your local branch can solve that. I have done this with Scottrade to set up my Johnson & Johnson DRIP - it was a simple online form that I printed from my account and then faxed to the local branch, and they did not charge a fee to process the share. I cannot speak for other discount brokers on whether or not fees apply.
In the General Mills DSPP, there are no fees for purchasing new stock or reinvesting dividends.
|GENERAL MILLS, INC. (click here for plan details)|
|Minimum one-time initial purchase for new investors||$250.00|
|* Or five minimum recurring automatic investments||$50.00|
|Minimum one-time/ongoing purchase||$50.00|
|Maximum calendar year investment||$250,000.00|
|Initial enrollment (new investors only)||$15.00|
|Dividend Reinvestment Fee||Company Paid|
|Check investment||Company Paid|
|One-time automatic investment||Company Paid|
|Recurring automatic investment||Company Paid|
|Dividend purchase trading commission per share||Company Paid|
|Optional cash purchase trading commission per share||Company Paid|
|Limit Order per transaction||$30.00|
|Sale trading commission per share||$0.12|
|Direct deposit of sale proceeds per transaction||$5.00|
|Certificate insurance||Company Paid|
|Certificate deposit||Company Paid|
|Returned check / Rejected automatic bank withdrawal||$35.00|
|Prior year duplicate statement||$20.00|
The only fees applicable are fees for selling stock, which are quite steep. However, remember the point of a DRIP/DSPP before enrolling. These are considered to be long-term, preferably generational holdings. These are plans meant to build wealth over generations and are very low-liquidity. Initiating a purchase or sale takes several days to process, sometimes over a week - this is NOT like a brokerage account where trades happen instantly. A decision to open a DRIP or DSPP should not be taken lightly, and should only be done if you are satisfied with the idea of owning the company for your entire life. As long as Johnson & Johnson remains financially sound, I intend to die holding the DRIP, willing it on to my future grandchildren. If you are more of a "trader" than a life-long investor, these plans are probably not for you. In short, for the true DRIP/DSPP investor, sales fees should not matter because the goal is to never sell.
Much like Johnson & Johnson, General Mills stock has been a bastion of security during the market's floundering over the past year.
The company has utterly decimated the index, and much of that can be attributed to the security their wide moat, dividend history and historical price performance has provided investors - they have flocked to the stock in droves seeking shelter. As a result, the stock is currently trading at all-time highs of $64.52/share with a very stretched P/E ratio of 26.3x. The company, in my opinion, is far from a value play at these prices, making a lump sum investment today something I could not recommend to anyone.
However, recall that valuation does not matter when DRIP and DSPP investing - over time, you have the opportunity to build a big position in one of the world's greatest companies with an exceedingly wide moat in one of the world's most impervious industries...fee free each month, as it currently stands. While DRIPs and DSPPs are not for everyone, this is certainly a strategy everyone should at least consider.
Disclosure: I am/we are long JNJ, SPY, QQQ.
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.
Additional disclosure: All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.