Seeking Alpha

1 Of These 5 Stocks Is My Next Retirement Portfolio Buy

Includes: BAM, MMM, MO, PM, SPG
by: Dividend Sensei

In order to achieve financial independence, I need a blue chip dividend growth portfolio that pays about $500,000 per year. I'm approximately 3% of the way there.

12-month recession risk is about 36%, meaning 64% probability of no 2020 downturn as long as things don't get worse.

The average of 19 leading economic indicators verifies this, being about 25% above historical baseline and contacting month to month at a very slow pace.

Per my long-term investing plan, I am investing 60% of monthly savings into stocks, split evenly between defensive and cyclical companies.

This week I'm buying $1,500 worth of one of five blue chip dividend stocks: SPG, MO, PM, BAM or MMM.

(Source: imgflip)

My financial goals are all about maximizing safe income over time, so I can achieve financial independence. I define that as being able to live off 50% of my post-tax dividends, which equates to about 40% of my gross portfolio income (since most dividends are taxed at 20% or less).

Since I want to eventually have a family (up to three kids and a wife), and the latest data indicates that three children cost $100,000 per year, I have to plan my goals for a long-term household budget of $150,000 to $200,000 (to err on the side of conservatism).

Does that seem rather high? It actually lines up with two recent data points I came across.

(Sources: Rob Berger of Forbes, Business Insider)

The first was a great article from Forbes Deputy Editor Rob Berger, who recently achieved what he calls level 7 financial freedom. That's based on the often-used rule of thumb that you need 25 times your annual income in order to be able to safely live off the 4% rule.

The last time I checked my portfolio value (5 weeks ago), I had about $280,000 representing 23 years of expenses (current levels), but just 1.65 last year's income.

Remember my personal definition of "financial independence" is 40% of total portfolio dividends equal my expected future expenses, which factor in a family of five. Since the goal of the 25 years of income nestegg portfolio value rule of thumb is to simulate a 4% withdrawal rate, that still equates to a $4.25 million portfolio size for me, but under my "live off 40% of total dividend rule" a portfolio value of $8.5 million to $10.6 million, assuming a 4% to 5% long-term portfolio dividend yield.

My underlying goal is to be able to ensure my future family (as much as five people) can be supported safely and comfortably, off 40% of total portfolio dividends alone. My five years of grinding poverty in Alabama taught me you can never have too much safe and growing passive income (or overall net worth). In reality the income I and my wife would generate would be spent while the portfolio would just run itself and grow exponentially. My definition of "retirement" means doing what I do now (I really love my job) but just four days per week, rather than five as I do now (used to be seven and then six).

(Source: Pew Research)

A 2018 Pew Research Center study, using 2016 Federal Reserve data, defined "upper class" as double the US median income. Here are the cutoffs for being "upper class".

Even with a major career setback this year (related to having to take care of my grandmother who has cancer) I'm still tracking for total income of about $174,000 per year, across all 36 of my income sources (including my 31 dividend stocks). By the end of the year I should hopefully be above the $175,000 per year required to support a family of five, in an "upper class" lifestyle, from my current income alone.

BUT again, the point of a dividend portfolio is to be able to not work at all (if you want) and live off 40% of total dividends alone. That requires $437,000 per year in annual dividends, or roughly speaking, a $10 million blue chip dividend growth portfolio, using Pew Researches' data (and adjusting for inflation over time).

I'm currently at $17,210 in annual dividends, a fraction (3%) of the way to my goal. I'm fortunate to have several income sources, and my career is progressing nicely, resulting in steadily rising income over time. My savings rate is currently about 80% post-tax, allowing me to invest over $100,000 per year in quality dividend stocks. The nine valuation/total return potential lists I maintain for Dividend Kings (covering 183 companies and counting) provide me great long-term income growth opportunities in any given week.

Fortunately, I'm 33 and have a long time to hit my ambitious goal. So let me walk you through why I plan to invest about $1500 this week into one of five quality dividend growth stocks on my epic quest to financial independence.

The Current State Of The Economy

The first thing I consider each month is the state of the broader economy.

I have a long-term investing plan that calls for aggressively buying during any future bear markets

  • 1 weekly Super SWAN (off the Dividend Kings Fortress portfolio watchlist)
  • 1 weekly high-yield deep value stock (off our Top Weekly Buy list)
  • 1 weekly double-digit dividend grower (tech takes priority but can also include rapid growers like UNH, V, MA, LOW, HD, etc)
  • BAM each week (up to 10% portfolio size)

In order to safely fund so many weekly buys during a bear market, I need a capital allocation strategy that naturally stores up dry powder during times of rising recession risk. But it must also allow me the financial flexibility to aggressively buy quality deep value companies when they go on sale (as with Altria today).

One approach many like to use is looking at the 10y-3m yield curve, historical the most accurate (though still an imperfect timing tool) recession forecaster tool ever discovered. There are lots of economic/recession risk models that use this (or other) yield curves.

The one I personally track each day is the one from the Cleveland Fed. Why Cleveland's model?

(Source: Cleveland Federal Reserve)

Because the New York Fed and Jeff Miller models (which Cleveland lines up with closely most of the time) are based on proprietary models that they don't disclose.

Cleveland provides this monthly summary table, which allows us to see how the changing yield curve over the past three months altered 12-month recession risk estimates.

This quarter each one basis point of inversion increases or decreases 12-month recession risk about 0.26% or 1% per four basis points of inversion.

Using the last month's estimate, and the average slope of the curve for the previous month, I can determine approximately the next Cleveland Fed estimate, should the current inversion persist for a full month, and become the new monthly average.

  • current 10y-3m yield inversion: 5.5 basis points
  • reduced risk relative to last Cleveland estimate: 8.5%
  • current 12-month recession risk (per bond market, if current inversion persists): 36% (down from a peak of 48% in recent weeks)
  • What this means: 64% probability of no recession by October 2020 as long as things don't get worse

But while the yield curve is a nice way to estimate recession risk (especially for econ nerds like me) it's still based on a model. When it comes to determining how much of my monthly savings go into stocks vs bonds and what kind of company I buy (defensive vs cyclical) I use an evidence-based approach derived from David Rice's Baseline and Rate of Change or BaR economic grid.

Mr. Rice tracks 19 leading economic indicators each week and uses their month to month rate of change and how far their average is above their respective historical baselines to create the best single graphical representation of the US economy in my opinion.

(Source: David Rice)

Every two weeks he updates the stats table which allows us to see how high each indicator is above its historical baseline. The "leading indicators" are the average of the eight most sensitive indicators (yield curve is one) which are the first to fall ahead of a recession.

Ahead of any future economic contraction the mean of coordinates or MoC (average of all 19 indicators), as well as what the eight most sensitive indicators are doing, will likely provide ample warning of an impending recession.

Per Mr. Rice, 20% above baseline indicates very little risk of a recession beginning within a year. The average of the indicators is actually about 25% above baseline after three long-term indicator revisions moved the MoC and LD down about 2% (the stats table will be updated September 17th).

MoC Distance Above Historical Baseline % Of New Monthly Savings Invested In Stocks % Of Stock Savings Invested In Defensive Companies
19.9% or below 0% NA (all bonds, which are entirely defensive)
20.0% to 22.4% 20% 100%
22.5% to 24.9% 40% 66%
25.0% to 27.4% 60% 50%
27.5% to 30% 80% 33%
Above 30% 100% NA (buy the best opportunities regardless of economic sensitivity)

Per this table, which I've calibrated for my personal use ahead of any future recession (to save up at least $100,000 worth of bonds to sell in a bear market to buy stocks), I'm currently investing 60% of my monthly savings into dividend blue chips.

That's smoothed out over weekly buys (using 3.6% costing margin as a revolving credit line that gets paid off each month). The 50% cyclical vs defensive target is a long-term goal and doesn't actually require me to alternative economically sensitive vs recession-resistant company purchases each week.

Since March I've bought about 57% defensive companies (recession-resistant cash flows and historically low volatility) meaning that I'm currently free to buy whatever I want.

But there is one other factor to keep in mind, other than the broader economic fundamentals.

The Current State Of The Broader Market

The S&P 500 is currently near record highs after President Trump decided to postpone increasing tariffs on $250 billion in Chinese imports from 25% to 30% by two weeks (October 15th rather than October 1st).

However, while this is certainly a good sign ahead of US/China trade talks in October, it also might not justify the broader market sentiment we're seeing today.

(Source: Mishtalk) - President Trump has now reported good news on trade talks 43 times

This is my favorite summation of the US/China trade war so far. The facts haven't actually changed, and currently tariffs are set to go up on October 15th and December 15th.

Moody's estimates that there is a 50% probability of no trade deal by 2020, a 35% probability of worsening escalation (30% tariffs on all Chinese goods, a wider trade war with the EU and Mexico, and a deep recession in the US), and 15% probability of an in-between scenario (some tariffs removed but not all of them).

Based on my reading of the situation I consider Moody's estimates reasonable, assume no progress on trade is the likeliest outcome, and view Trump's latest move as a way of boosting stocks to new record highs (he seems to believe that will help his re-election chances).

Before the trade war began US tariffs averaged 3%. Between that of Turkey and Japan.

We're now set for 7.5% average tariffs, the second-highest of any large economy.

What does this mean for stocks? At the start of the year, analysts estimated we'd get a trade deal in 2019 and S&P 500 EPS would grow about 10%. According to FactSet Research, 2019 EPS is now expected to grow 1.3% and that estimate has been falling steadily all year. 2020 earnings growth is still estimated to be 10.6%, however, FactSet points out that over the last 15 years analyst estimates come down an average of 3.1% prior to earnings being released, allowing 72% of companies to beat expectations.

This kabuki theater, of analysts lining up companies for easy "beats", still means that we can use forward blended EPS estimates as a rough guide to how overvalued/undervalued the overall stock market is.

The current forward EPS consensus, per FactSet, is $174 (some data sources estimate $171.6), meaning that if the S&P 500 sets a new record high of 3,026 that would mean a forward PE of 17.4 to 17.6. According to JPMorgan Asset Management, the 25-year average forward PE is 16.2, which I use as my approximation of "fair value" for large-cap US stocks in general.

17.5 forward PE would mean the S&P 500 is about 8% historically overvalued, and one other indicator I track indicates that investors might be getting a bit too euphoric.

(Source: CNN)

CNN's Fear and Greed Index uses 7 short-term sentiment indicators, such as the VIX and put/call volumes, to estimate real-time investor sentiment. (Source: CNN)

Whenever the market's forward PE hits 17.5 and the fear and greed index is 75 or higher pullbacks of 5.5% to 9.9% become far more likely and correction risk (10% to 19.9% declines from all-time highs) becomes elevated.

We're not quite at levels that indicate a pullback is the most probable outcome, but historically the best time to buy cyclical companies like banks, industrials, energy, and volatile tech stocks is when sentiment is below 20 and pessimism is running rampant.

Note that I'm not advocating market timing in the traditional sense.

  • I am NOT selling anything I own (including hundreds of thousands worth of cyclical blue chips)
  • I am NOT selling anything in Dividend Kings portfolios (we have about 50% exposure to cyclical companies across four portfolios)

The reason I monitor sentiment and estimate real-time recession risk is because many investors are less volatility tolerant than I am. In order to minimize long-term volatility relative to the market and thus maximize "SWANiness" in our more popular High-Yield Blue Chip and Fortress portfolios, I use the best available broader market valuation/investor sentiment and macroeconomic data to tweak our weekly portfolio buys each week.

Once a stock is purchased, we hold onto it, unless the thesis breaks. Optimizing weekly buys to target secondary goals (like lower volatility) and defensiveness (falling less during downturns) is the purpose of tracking big picture factors like this.

The core strategy my (and Dividend Kings') portfolios all use is based on

  • above average quality companies
  • with weighted growth rates equal to or better than the market's 6.5% long-term average
  • bought at reasonable to excellent valuations (fair value or better)
  • held for as long as the thesis remains intact

Why I'm Considering These 5 Dividend Stocks For My Next Retirement Portfolio Buy

Company Quality Score (11 Point Scale, 7= Average Quality Company, 2% Recession Dividend Cut Risk) Yield Current Price Historical Fair Value Discount To Fair Value 5-Year CAGR Total Return Potential
Simon Property 11 5.4% $156 $206 24% 11% to 18%
Altria 9 7.6% $44 $63 30% 15% to 23%
Philip Morris International 10 6.1% $75 $88 15% 12% to 19%
Brookfield Asset Management 11 1.2% $54 $52 -3% 16% to 21%
3M 11 3.4% $171 $188 9% 11% to 18%
Average 10.4 4.7% 15% 13.0% to 19.8%

(Sources: Dividend Kings Master Valuation/Total Return Potential List, F.A.S.T Graphs, Factset Research, Gordon Dividend Growth Model, analyst consensus, management guidance, Morningstar) - note historical margin of error on total return model is 20%.

As you can see it's a solid group of buy candidates averaging a yield of almost 5%, that's about 23% more undervalued than your average large-cap, and is likely to deliver double-digit long-term returns. That's even factoring in the Gordon Dividend Growth Model's 20% historical margin of error, created by the uncertainty of whether or not the market will be extra bearish or bullish on a stock five years from now. Even applying the 20% margin of error to the lower end of the average total return potential range (extreme bearishness persists) those five stocks, owned in equal weighting, should deliver double-digit total returns.

That's likely to beat the market given that

  • JPMorgan Asset Management expects 5.3% CAGR total returns from the S&P 500 over the next 10 to 15 years
  • Bank of America expects 6% CAGR total returns from S&P 500 over the next decade
  • Gordon Dividend Growth Model estimates about 7% CAGR forward returns for the S&P 500 over the next five to 10 years

The candidates average a 10.4/11 quality score, compared to 9.6 for your average dividend aristocrat and king (MO and 3M are dividend kings).

Why I May Buy Simon Property Group

I love taking a contrarian position when the market is acting stupid and wrong on the facts. In this case, SPG is drifting lower again after news that Forever21, its 7th biggest tenant is likely to file for bankruptcy soon.

Here are the actual facts and why SPG is a very strong buy.

  • Forever21 represents 99 stores and 1.3% of SPG's rent
  • management is talking with the retailer about possibly keeping some stores open
  • SPG's lease spreads were 27% in Q1 and 32% in Q2 (a 10 year high) precisely because Sears and other retailers (like Bon-Ton) went bust.
  • SPG's balance sheet is a fortress, with an A credit rating, $6.8 billion in liquidity and it just sold 30-year bonds at 3.25% (extending duration of its bonds while refinancing at lower interest rates)
  • SPG is retaining $1.5 billion in cash flow this year, enough to fund more than 100% of its $5 billion long-term development backlog
  • SPG is buying back shares at an annualized rate of 1.5% at FFO yields as accretive as its redevelopment projects

The bottom line is that SPG remains near the lowest valuation in 10 years, and has NEVER traded at these multiples when its fundamentals were so strong. The market might be worried about more retail bankruptcies (JC Penny is likely doomed and Macy's isn't looking so hot) or possibly that long-term rates will keep rising (according to JPM just 50% of the recent yield crash was justified by fundamentals).

As a long-term income investor only concerned with fundamentals and valuation, I don't care about the "story" Wall Street chooses to obsess over today.

To paraphrase football legend Jerry Rice "today I buy what others won't, so in the long run I earn returns others can't."

Why I May Not

Since my potential buy group never includes a low quality or dangerous yield trap, the reason for not buying anything is usually about opportunity cost. SPG's dividend is very safe during the next recession (sub 1% cut risk). BUT Moody's estimates a 35% probability that the US will eventually impose 30% tariffs on all Chinese imports.

Should that occur retailers are going to suffer, a recession becomes far more likely and SPG could decline even more. However, SPG's 25-year beta is 0.4 (equal to defensive dividend king Super SWAN JNJ) and during a bear market, it's likely to decline less than the broader market (making it a fine defensive buy right now).

Why I May Buy Altria

I've now bought Altria a total of eight times. Seven of those where at steadily lower share prices. MO is a classic example of how I love to "be greedy when others are fearful."

Today the market is obsessing over headlines about 380 vaping illnesses and six deaths. While we don't know the exact cause of those cases, the initial evidence points to vitamin E oils used in THC containing e-liquids that are not sold by Juul but brewed up in people's kitchens and sold on the street.

It should be pointed out that

  • the UK (which has done the most extensive long-term studies on vaping) has concluded it's 95% safer than smoking
  • Public Health England and the UK National Health Service encourage smokers to switch to vaping
  • six vaping deaths in the US (caused by home brewed e-liquid concoctions not sold by Juul or any large tobacco company) is 80,000 times less than the 480,000 US smoking related deaths each year, per the CDC.

Totally banning vaping would be the equivalent of banning plane travel (the safest form of travel in terms of death/mile) which would cause traffic fatalities to rise much higher.

The President has said he will order the FDA to consider banning flavored e-liquids, possibly due to the election and the scary headlines (he wants to be seen doing something to save people). Later Trump walked back his proposed ban, saying he simply wants to make sure that vaping is safe. The UK regulates vaping stringently for quality of products, which is why its National Health Service doesn't demonize vaping but actually endorses it.

So here's the truth about the worst-case scenario about Juul (100% US vaping ban, VERY unlikely) and what it would mean for MO.

  • MO is all about the dividend which is paid out of cash flow, 85% of which is from selling cigarettes
  • cigarette volume declines have accelerated, and management says it virtually all due to vaping growth (with Juul driving most of that)
  • Juul is growing like a weed )nearly 200% YOY growth) so MO's investment thesis is holding for now
  • If Juul is decimated in the US then MO's cash flow won't be hurt by a single penny
  • Juul is an equity stake but pays MO no dividends and it will likely be years (if ever) before MO's cash flow would be helped by Juul
  • Juul failing in the US would mean MO's core business stabilizes, and its growth prospects would likely improve.
  • The PM merger is now highly likely and PM could market Juul in over 180 countries, that don't have such bans
  • Juul could end up achieving sufficient growth to validate MO's investment in the company
  • Even if it doesn't, a Juul writedown, even to zero, would have zero effect on MO's cash flow, dividend safety, and not significantly hurt its long-term dividend growth potential
  • Juul is now starting sales in China, a market where US tobacco companies aren't allowed and have hundreds of millions of potential customers

China has 300 million smokers, almost as many potential customers as the US has people in total. This means that even if the FDA were to totally ban Juul in the US (highly unlikely) the current pessimism about MO is not warranted.

And then there's the PM/MO merger. I recently highlighted all the reasons this $200 billion merger would likely be a huge win for shareholders in both companies.

CNBC is reporting that MO and PM have basically agreed to the economic terms of the merger and are finalizing the community outreach issues.

With PM now hiking its dividend 2.6%, here are the only two numbers dividend investors in MO need to care about.

  • 0.718 to 0.8 PM shares per MO share

0.718 is a $52.5 buyout price for MO, representing a 25% premium. 0.8 is about a $58 buyout price, the most PM can pay without reducing EPS next year via dilution. The lower ratio will maintain MO's current dividend income, which is the major concern of all Altria shareholders. Anything above 0.718 PM shares per MO share and current MO investors would get an effective dividend hike.

I'm estimating a 75% probability that a merger will happen, and 80% confident that it will be between those two exchange ratios (so 60% probability that a deal will happen between those two ratios). The new PM would be the global king of nicotine, with far more stable cash flow, a lower payout ratio, and within a year or two, a stronger balance sheet.

Buying MO is partially an arb bet on the merger happening as I expect. If it does MO would gap up 20+% (I'm anticipating a 0.718 ratio) potentially netting me a $4,000+ paper gain in a day on a position that's just 4.3% of my portfolio. More importantly, I'd have locked in about $1,300 in safe and steadily growing dividend per year, supported by recession-resistant cash flow that's much more diversified, both by type (like heat sticks) and with reduced US regulatory exposure (relative to MO's 100% US exposure today).

In the PM section, I'll explain why I expect the new PM to eventually become a Super SWAN dividend king.

Why I May Not

The reason MO likely fell so much in the past few weeks is the initial rumors about a "merger of equals" with zero premium. That would imply about a 0.6 PM/MO exchange ratio which would mean a 19% dividend cut for MO shareholders. The stocks currently trade at an exchange ratio of 0.58 (thus the big arbitrage opportunity).

MO just became a dividend king with its 50th annual payout hike. Since this stock is literally all about the dividend, I can't see shareholders approving a sale of the company at such a huge discount to fair value. I estimate a 20% probability that a zero premium take under occurs. Even if it did the benefits of owning PM after the deal closed would make this worst-case scenario a non-thesis breaking event and I wouldn't sell my shares.

Why I May Buy Philip Morris

Why would I be willing to hold onto MO and accept shares of the new PM if I face a potentially sharp dividend cut under the rumored 0.6 exchange ratio? Because remember that Altria shares would become Philip Morris shares and PM would be getting MO's stable cash flows for a steal.

PM is already expected to grow 8.3% CAGR over time (analyst consensus) in-line with management's 8+% constant currency guidance. Anywhere between 0.718 and 0.8 PM buying MO would be accretive to next year's EPS and synergistic cost savings could boost growth over the next three years by 0% to 1%.

If PM were to pay 0.718 PM shares per each MO share you own, it will likely grow at 10% to 12% annually through 2022 and likely 9% to 10% over the next five years. If it paid just 0.6 for MO (30% discount to fair value) then its growth would be about 1% higher still (11% to 13% through 2022).

PM's 2.6% dividend hike for this year is way below what I expected (5% to 7%). What that tells me is that management is laser-focused on deleveraging.

MO has a net debt/EBITDA ratio of 2.5, PM 2.1. The combined company would have a leverage ratio of 2.3. But the accretive nature of a 0.6 to 0.718 exchange ratio buyout of MO would mean that PM's leverage within a year or two could fall below 2.0 (3.0 or less is safe for a tobacco company).

The FCF payout ratio is set to fall to 80% to 85% by 2021 depending on the price PM pays for MO and how well cost synergies go. 85% or less is very safe for a tobacco company and if leverage is 2.0 or less then I would upgrade PM from a level 10/11 SWAN to an 11/11 Super SWAN.

One that would be growing by about 1% to 2% faster than MO and still yielding over 6% (my YOC would be about 6.2% on recent investments even on a no premium PM buyout).

Why I May Not

Since I'm highly confident that PM is going to end up buying MO at an exchange ratio that preserves MO's dividend king status (which PM would then inherit) not buying PM comes down to opportunity cost. PM and MO are now effectively linked due to the merger talks.

MO would likely gap up significantly if PM buys it at a price that's fair to shareholders of both companies (an unfair price means a deal isn't likely to be approved by shareholders of one of them).

Thus buying MO instead of PM is a way to both lock in higher annual income, and enjoy a strong short-term return (my cost basis is $45.5 and the likely buyout price would be about $52.5).

Anyone who disagrees with me and thinks PM is going to rob MO blind with a zero premium buyout should buy PM instead of MO. That's because once the uncertainty is gone, both stocks could recover quickly, given their actual fundamentals and low historical valuations.

Why I Might Buy Brookfield Asset Management

BAM is a Super SWAN growth stock who makes up for a paltry yield and ho-hum 7% annual dividend growth with sensational total return potential.

BAM’s Total Return Since 2002

(Source: Portfolio Visualizer) portfolio 1 = BAM

Since Bruce Flatt took over as CEO BAM has delivered nearly 20% CAGR total returns, nearly three times that of the broader market.

It's the Berkshire of global hard asset managers, and in a low-interest rate world, demand for cashflow rich assets is likely to boom. Add to that the fact that global infrastructure demand is estimated to be nearly $100 trillion by 2040 alone (per the OECD) and you can see why management is confident it can win a significant share of the estimated $25 trillion in new AUM that will be up for grabs by 2030.

BAM's empire of private equity funds and LPs is expected to drive 13% to 24% CAGR growth in its fundamentals over the next five years (for things like FFO/share and NAV/share).

Management, who is highly skilled at valuing assets, estimates NAV/share at $68. Using purely historical valuation metrics, I estimate just $52. BAM is 3% above that level, but for Super SWANs like this I consider paying up to a 4% premium to be "reasonable".

That's especially so for a company with 16% to 21% CAGR long-term total return potential. If management is right about its NAV/share and delivers on 24% CAGR NAV/share growth over the next five years, and the market ever values BAM based on NAV/share, then 30% CAGR total return potential could be possible.

Why I Might Not

BAM is one of the best companies on earth, no question. BUT while management's track record of delivering on guidance is excellent, it still pays a 1.2% yield and is growing its dividend by 7%.

Corrections and bear markets are no fun. A juicy dividend stream is a cornerstone of how I stay calm and rational during downturns. Buying BAM, with recession risk this high, could mean forgoing some truly excellent dividends from SPG, MO or PM and waiting many many years before this investment pays off.

Why I May Buy 3M

There is a lot to like about Super SWAN dividend king 3M. Its yield is well above average (more than most "high-yield" ETFs). It's also down about 6% for me, and I love nothing better than lowering my cost basis, thus maximizing safe income and long-term returns if I'm right.

Even if the analyst consensus of 6% long-term growth is correct (management guidance 8% to 11%) 3M is likely to deliver double-digit total returns. That's far above JPMorgan's long-term market forecast of 5.3% CAGR total returns, Bank of America's 6%, and the Gordon Dividend Growth Model's 7% estimate.

Why I May Not

While there is nothing wrong with buying a quality undervalued blue chip on the upswing (Dividend Kings does it all the time), my personal preference is to pound away on a stock when it's crashing.

I call this "catch a falling blue chip with conviction" and it means buying with wild abandon when the market hates it most up to the point of hitting my risk management limits on position size. 3M is up nicely in recent weeks, and the trade talks in October are likely to disappoint a currently bullish Wall Street.

So with shares possibly set to decline in a pullback opportunity cost is a consideration for me.

Bottom Line: Process Is More Important Than Short-Term Outcome So Focus On Doing "Consistently Not Stupid" Investments That Meet Your Needs

All my retirement portfolio articles are meant to be an investment journal for me AND serve as an example to others about how to think about your personal needs.

SPG, MO, PM, BAM, and MMM are all active holdings in Dividend Kings portfolios and safe to buy today (assuming you have a properly constructed portfolio and 5+ year time horizon). But whichever of these blue chips I end up buying remember that your needs are different than mine.

I'm steadily buying each week, as part of a decades-long plan to amass a fortune so I can support my family on half my post-tax dividends alone, guaranteeing an exponentially rising standard of living.

If you're already retired and your top priority is maximum safe yield, then some of my candidate companies might work for you (like MO, PM, and SPG), and some might not (like BAM).

Also, keep in mind that all my stock ideas are purely meant for the equity portion of your portfolio. "Defensive" just means "recession-resistant cash flow and historically low volatility". No dividend stock is a bond alternative and almost all stocks fall during bear markets.

It is not wise to count on any stock going up in a recession. Bonds/cash equivalents are what will see you through a prolonged down market. My use of bonds is thus different than most people's, since I am perfectly comfortable ignoring my portfolio value for years on end if need be, and focusing purely on my safe annual portfolio income ($17,2010 and growing by the week).

Disclosure: I am/we are long SPG, MO, PM, MMM. 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.