Sunday, September 9

Week 62 - The Steady Eddies

Situation: The older we get, the less interested we are in trying to hit a home run with our stock picking. We’re more satisfied hitting some singles and doubles, and realize that this is a sounder investing strategy, i.e., beating the market a little at a time. Most importantly, we don’t ever want to experience again that sinking feeling we had in September of 2008 as we watched the market tank. Our goal has become to have our stocks and mutual funds keep up with the market when it rises but not when it’s falling. In previous blogs, we’ve called attention to “Lifeboat Stocks” (see Week 50) issued by highly regarded health-care and consumer staples companies. Our blog this week uncovers more such companies, “The Steady Eddies,” where ever they might be hiding. 

We began our search using the Zacks database of publicly traded world-wide stocks. Next, we selected for:
   a) dividend yield of 2% or more,
   b) 5 yr dividend growth rate of 3% or more,
   c) return on investment (ROI) of 10% or more,
   d) average 5 yr ROI of 10% or more.
That screen turned up 200 stocks.

Our next step was to examine how those companies have rewarded their investor-owners since the end of the dot-com bear market (7/02), and how they’ve hurt investor-owners during the 10/07 - 4/09 bear market. If that 10+ yr Total Return was less than 5%, i.e., the inflation rate (2.5%/yr) plus a real gain of 2.5%/yr, we rejected the stock because it hadn’t come close to keeping up with the S&P 500 Index, which gained 5.6%/yr. And, if the stock lost more than 30% during the 18-month bear market we rejected it (even though the S&P 500 Index lost 46%). Remember, the key feature of a Steady Eddy is that it falls less than the market. Finally, we pay attention to Warren Buffett and reject any companies that are capitalized predominantly by loans and any with a 5-yr Beta of more than 0.7. At the end of our analysis we had 15 companies (Table), all of which are familiar to risk-averse investors. What this means is that these stocks can only be had by paying a premium price. You will have to buy and hold these stocks for 10-15 yrs to realize their rather impressive ability to generate wealth through good times and bad. Two Vanguard mutual funds are also included for comparison purposes. None of the 15 companies were on our list of 90 companies that have a Durable Competitive Advantage (see Week 54) because the last step in calculating that advantage is to project the 10 yr total return (see Buffett Buy Analysis Week 30), which is anchored to the current price.

Bottom Line: We’ve satisfied our quest for a portfolio of safe stocks but there are a lot of fellow investors who like to throw money at these companies. Nonetheless, you’ll be rewarded for maintaining DRIPs (dividend reinvestment plans) in 5 of these companies and making regular small additions (dollar-cost averaging). The growth of your investment will be slow but steady, like watching paint dry. I’m certainly satisfied with the 5 companies that I chose long ago for my DRIPs: MCD, PG, KO, ABT, MKC. At one time I owned stock in 4 others that I bought through a brokerage but then I prematurely gave up on the investment and sold (see Table): GIS, NVS, PEP and KMB. The lesson I learned is to do careful research then take the trouble to set up a DRIP and build it up gradually through automatic additions taken from your checking account. It then takes more thought and effort to close out a position than a mere phone call to your broker.

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