I believe we’re at the front end of a period of multi-year economic weakness. While the Federal government will continue to attempt to prop up the economy through simulus and quantitative easing efforts, I believe in the end, that these efforts will fail. The credit destruction will continue to out-run the fiscal blitz by our leadership. As such, I’m looking to position myself for a prolonged recession/depression. This means significant cash holdings, sound recession-resistent stocks with dividends, and even some precious metals holdings (to hedge against the possibility of monetary stimulus going too far).
If you agree with my economic views, you’re likely to also agree with one of my top stock picks for the years ahead: Wal-Mart Stores Inc. (NYSE:WMT). As the economy deteriorated starting in 2007, it became clear that Wal-Mart was benefiting from a massive trend of trading down from higher end retailers to the low-cost retailer. While we’ve seen a blip of increased activity over the last year in high-end retailers, I believe this trend is not sustainable. As the public becomes aware of a double-dip recession or simply the continuation of this prolonged economic downturn, people will migrate back to the lowest priced retailer, which is Wal-Mart.Dividends
One of the main reasons to buy and hold Wal-Mart is because of the dividend and their history of increasing their dividend. Since 1999, Wal-Mart has increased its dividend payout every year from $.20 annually in 1999 to $1.21 annually in 2010. From 2009 to 2010, Wal-Mart increased it’s quarterly dividend from $.2725 to $.3025 per share (an increase of 11%). At this rate of increase, Wal-Mart’s dividend is doubling every 6-7 years. While the official dividend for the stock yield will probably stay fairly constant as the share price increases, it’s important to remember that your return on your allocated capital at this time will continue to increase each year.
The history of increasing dividends is one of the driving reasons why I invest in Wal-Mart using a DRIP (Dividend Reinvestment Plan). You can see more details on the Wal-Mart DRIP plan by visiting their website.What About Inflation?
For those of us who are concerned about future inflation, you might wonder if investing via a buy-and-hold strategy in Wal-Mart would be a wise move considering the increased risk of future inflation. While Wal-Mart shares hardly represent a comprehensive inflation-hedge, you could definitely do worse. Shares in Wal-Mart’s stock represent ownership in not only one of the world’s best and most profitable companies, but also the world’s best, most efficient and cost-effective retail networks. Wal-Mart stock represents a real asset. Can its shares get inflated and overbought (or sold) due to broad market movements? Yes. But building up an ownership stake in Wal-Mart is a worthwhile investment and inflation-hedge.Buy Now?
While many stocks have become overbought and overvalued due to the massive run in the stock market since March 2009, Wal-Mart’s stock has risen moderately over the last year. Similarly, if you view the below chart, Wal-Mart’s stock held up much better than many others during the “crash” of 2008.
There are few stocks that I like to be bought right now at current levels. Wal-Mart is one of them. If you’ve had a big run in some stocks over the past year, consider rotating some of your winners into a more defensive name like Wal-Mart. For others looking to start a position and build over time, I’d recommend the DRIP route as I mentioned above.
Disclosure: Long WMT