Sunday, July 15

Week 367 - Safe and Effective Stocks

Situation: The stock market is becalmed, waiting for wind to fill its sails. "Risk-On" investors seem to be out of ideas, except for a renewal of interest in the energy sector. The bond market is experiencing hard-to-predict volatility. Safe stocks that will grow your money effectively are hard to find. The formula for Net Present Value tells us that more value is found when your original investment is returned to you quickly. Therefore, an “effective” stock is one that pays a good and growing dividend. 

Mission:Safe stocks” = an oxymoron. Basically, we’re looking for a group of high-quality stocks issued by companies in “defensive” industries (Utilities, HealthCare, Consumer Staples, and Communication Services). “Effective stocks” are those that a) pay an above-market dividend, b) grow that dividend at an above-market rate, and c) have an above-market 16-Yr CAGR. Our reference for the “market” is the Dow Jones Industrial Average ETF (DIA). 

Execution: see Table.

Administration: What are “high-quality” stocks? Those are either “Blue Chips” (see Week 361) or members of “The 2 and 8 Club” (see Week 327 and Week 348) plus its Extended Version (see Week 362). “Safe and effective” stocks are those that have no red highlights in Columns D, E, G, I, K, and M of the reference Tables. (Red highlights indicate underperformance vs. DIA.) In addition, we require that the company be a Dividend Achiever, and that its long-term bonds have an S&P rating of A- or better (see Column T).   

Bottom Line: We find that only 5 companies issue “safe and effective” stocks (see Table). Were you to own shares of similar value in all 5, you wouldn’t be gambling. In other words, your risk-adjusted returns would likely “beat the market” by 1-2%/yr over a market cycle. But your transaction costs would also be 1-2% higher vs. owning shares in the leading S&P 500 Index Fund (SPY).  

Risk Rating: 4 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into NEE, KO, and JNJ.

"The 2 and 8 Club" (CR) 2018 Invest Tune All rights reserved.

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Sunday, July 8

Week 366 - A Capitalization-weighted Watch List for Russell 1000 Companies

Situation: Every stock-picker needs to confine her attention to a manageable list of companies, called a “Watch List.” Here at ITR, the focus is on investing for retirement. So, our interest is in companies that have a higher dividend yield than the S&P 500 Index. Why? Because your original investment will be returned to you faster, which automatically gives your portfolio a higher “net present value” than a portfolio composed of companies that pay either no dividend or a small dividend. Once you’ve retired, you’ll switch from reinvesting dividends to spending dividends.

Mission: Assemble a Watch List composed of companies that are “Blue Chips” (see Week 361), companies that are in “The 2 and 8 Club” (see Week 344), and companies that are in the Extended Version of “The 2 and 8 Club” (see Week 362). 

Execution: see Table.

Bottom Line: If you’re saving for retirement and would like to pick some individual stocks to supplement your index funds, here is an effective and reasonably safe Watch List. However, the mutual funds that pick individual stocks haven’t done very well compared to benchmark index funds. So, your chances of doing well as a stock-picker also aren’t good. But index funds like the SPDR S&P 500 (SPY) expose you to significant downside risk. There is one conservatively managed mutual fund that we think is an excellent retirement investment, the Vanguard Wellesley Income Fund, which is mostly composed of bonds. Your risk of loss from owning VWINX is less than half that from owning SPY; the 10-Yr Total Return is 7.0%/yr vs. 9.0%/yr for SPY.

Risk Rating for our Watch List: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into MSFT, JPM, XOM, WMT, PG, KO, IBM, CAT and NEE, and also own shares of GOOGL, CSCO, MCD, MMM, TRV, CMI and ADM.

"The 2 and 8 Club" (CR) 2018 Invest Tune All rights reserved.

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