The sharp market downturn has raised many questions
Three recent Seeking Alpha articles about the current downturn aimed to help investors who have watched their portfolio values shrink. This is new territory for those who entered the market after the bottom in March, 2009.
Victor Dergunov's December 18 article describes "why stocks could be headed a lot lower from here." He cites multiple causes for the market's present weakness and concludes that "there could be substantially more down side."
Benjamin Lavine's December 21 article sees "growing risk to dividend-focused strategies." His thesis is that corporations need to reduce debt levels and one competitor for those dollars is the company's dividend. He says at a minimum this will slow dividend growth and some companies will make dividend cuts.
Eric Parnell's December 22 article asks, "What now?" He continues to be "long-term bearish on the U.S. stock market." Though he recognizes signs that we may have a technical bounce from the swoon of the past 3 months, he sees weak market technicals for the long term. He concluded: "It remains important to stick to your investment philosophy and program despite this recent volatility...." I agree, and here's my strategy:
About three years ago, I decided to focus less on the day-to-day (or month-to-month) fluctuation in the portfolio's market value. Since then I have focused on growing the portfolio's average monthly income, to do so with a priority for quality and to avoid "reaching for yield."
This means a steady focus on the relative safety of the portfolio's income. Now I pay more attention to a company's credit rating. Is the balance sheet strong? Is the company heavily in debt? Is there a commitment to prudently, safely grow the dividend? Is there a solid history of dividend growth?
Following Lowell Miller's advice in The Single Best Investment, I want companies with BBB+ or better Standard & Poor's credit ratings. Following the work of David Fish, Justin Law and the DRiP Investing Resource Center, I look for companies with consecutive years of dividend growth.
I want quality companies that have the strength to withstand recessions and bear markets.
Is this the long-awaited bear market?
A few months ago, I noticed a sizable number of stocks were 20% or more below their 52-week highs. I added a column on my spreadsheet to indicate this metric for the portfolio companies. At first, it seemed like the market was in a stealth decline. It "sneaked up on me." I was surprised to see many companies in the industrial and financial sectors showing significant weakness, particularly since those two sectors had been strong just a few months earlier. I realized that our continuing pattern of sector rotation had hidden some of these declines from my view.
As of December 21, the 35 equity positions in my retirement income portfolio average a 23.2% decline from their 52-week highs. I've taken advantage of this weakness to add several new positions, such as:
- BlackRock (BLK), down 37.7%;
- Manulife Financial Corporation (MFC), down 38.3%;
- Cummins Inc. (CMI), down 34.0%;
- AbbVie (ABBV), down 32.5%;
- United Parcel Service (UPS), down 31.0%;
- Illinois Tool Works (ITW), down 30.7%;
- Brookfield Property REIT (BPR), down 27.9%;
- Eaton (ETN), down 26.1%; and
- Royal Dutch Shell (RDS.B), down 24.9%.
This may be "just a correction," but these are bear market numbers. Last week, in particular, I received numerous alerts from Custom Stock Alerts, notifying me that various stocks had dropped below price targets I had set.
If this is "the big one," how far will stocks fall?
Since early 2015, I've tried to steel myself for the next bear market. I remind myself that while the general trend of the stock market over time is up, declines of 50% or more must be expected from time to time.
The 9 portfolio stocks listed above have declined from 24.9% to 37.9% from their 52-week highs. In his aforementioned article, Victor Dergunov wrote:
"The recent price action is no longer indicative of a correction, but is much more in tune to the type of price action one would expect to see in the early stages of a bear market. ...This is why utilities are at around an alltime high right now, while real estate is close to its 52week high, and consumer staples are only off by around 5% from recent highs. On the other hand, sectors like energy are off by 21%, financials are down by 20%, materials are down by 20%, technology is off by 15.5%, consumer discretionary are down by 16%, industrials are off by 17%, etc."
Dividend investors have a somewhat different focus
As a dividend investor, much of the market news is of little or no interest to me. Momentum stocks such as Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL) are not part of my investing universe. I have no consciousness of their price movements.
But I'm acutely aware that the dividend stocks in my universe have reached some very attractive yields through a combination of market price declines and dividend increases. In February, 2018, AbbVie increased the dividend by 35.2%, from $.71 per quarter to $.96 per quarter. That increase, coupled with recent price weakness, means that ABBV's current yield is 5.04%, compared with 2.91% on December 26, 2017.
In response to a December 21 blog post by David Crosetti, I offered this observation of some other current yields compared with December 26, 2017:
|Int Bus Mach (IBM)||5.66%||3.93%||A|
My question: "Is the dividend relatively safe?"
I'm a dividend investor. My purpose for being in the market is to design and manage a portfolio of high quality companies that provide a relatively safe and growing stream of dividends for supplemental retirement income. I use the term "relatively safe" because there are no guarantees in the stock market.
I don't know how far an individual stock may decline or the how far the market value of the portfolio will decline. As of December 21, the portfolio is down 5.13% for calendar year 2018. Since 12/31/2015, the portfolio is up 33.31%. I rarely pay attention to these figures.
However, I pay close attention to changes in the dividends. This year there have been no dividend cuts among the 35 companies in the portfolio. Only two companies, Royal Dutch Shell and Apple Hospitality REIT (APLE), have not increased their dividend this year. Eight portfolio companies are Dividend Champions, with at least 25 consecutive years of dividend increases; eight are Dividend Contenders (10+ years); and sixteen are Dividend Challengers (5+ years). Of the 35 companies in the portfolio, the average number of consecutive years of dividend increases is 18.
As of December 21, the top 10 companies by market value are:
- Johnson & Johnson (JNJ), 3.23%;
- Procter & Gamble (PG), 3.12%;
- Exxon Mobil, 3.09%;
- Royal Bank of Canada (RY), 3.04%;
- BlackRock, 2.98%;
- Cisco (CSCO), 2.95%;
- Toronto-Dominion Bank (TD), 2.95%;
- Bank of Nova Scotia (BNS), 2.94%;
- PepsiCo (PEP), 2.93%; and
- Illinois Tool Works, 2.88%.
Lessons from the Great Recession
One of my memories of 2008-2009 was that great companies were beaten down alongside average or below average companies. Everything went down.
While this was discouraging, it also provided some interesting opportunities. I sharpened my pencil and identified some very attractive entry points for some great companies. I looked for those occasional upticks in companies that I owned but wanted to exchange for higher quality companies.
I've done some of this in the present market downturn. I want to go into the next recession with the highest possible quality companies. Last week I added to several positions, such as JNJ, XOM, BLK, CSCO and ITW.
As I weigh the relative merits of portfolio companies and those on my watchlist, I'm helped by several resources, including Seeking Alpha articles, F.A.S.T. Graphs, BetterInvesting.org, and Simply Safe Dividends.
This past week I received two notes from Simply Safe Dividends. One was regarding Johnson & Johnson's drop in price due to a legal decision and the other was PPL Corporation's (PPL) drop in price due to a British regulatory decision. The two notes helped me see past their present situations to focus on their long-term potential.
In January, I will provide a complete Q4 portfolio review.
I'm not advocating the purchase or sale of any security. My articles generally offer ideas for stocks to study. These articles form a journal of my effort to design and maintain a retirement income portfolio with a relatively safe stream of growing dividends. I seek companies with histories of rising dividends, strong financials and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.
Disclosure: I am/we are long JNJ, XOM, PFE, PG, MMM, BLK, CSCO, RY, TD, PEP, ITW, IBM, TXN, CMI, UPS, BNS, RDS.B, QCOM, SPG, MFC, PPL, ETN, ABBV, SKT, ENB, EPD, BIP, BEP, VTR, BCE, T, WPC, MAIN, BPR, APLE, ADX, IFN, RMT, RVT. 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.