Sunday, July 26

Month 109 - 6 High-yield A-rated Non-financial Growth Stocks in the Dow Jones Industrial Average - July 2020

Situation: The purpose of a retirement portfolio is to accumulate wealth during working years and distribute that wealth during sunset years. The laws of finance that govern accumulation are “reversion to the mean” and “compound interest”. The closest we have to a law of finance that governs distribution is “the 4% rule”. 

If we dollar-cost average our purchase of shares on a monthly schedule during the accumulation period, we’ll never overpay over a given market cycle, i.e., we’ll “buy low” as often as we’ll “buy high” as reversion to the mean works its magic. If we automatically reinvest quarterly dividend payouts, this quarter’s dividend will pay a dividend on last quarter’s dividend as “compound interest” works its magic. During retirement, we’ll spend 4% of our total asset value, as calculated on December 31st of the year just ended, in the coming year. 

A-rated high-yield growth stocks in the Dow Jones Industrial Average (DJIA) have a dividend yield of ~3%/yr. So, if you’ve been dollar-averaging into those stocks you’ll occasionally want to sell shares in one of those stocks to meet next year’s spending goal. But given the stability of those reliable and growing payouts, I’d suggest that you look elsewhere to make up the projected shortfall. Why? Well, look at the spreadsheet of this month’s 8 DJIA growth stocks. If you own shares in all eight companies, you’re likely to enjoy a dividend yield of more than a 3%/yr for years to come. 

Mission: Find A-rated non-financial growth stocks in the DJIA that have an above-market dividend yield; analyze those by using our Standard Spreadsheet.

Execution: see Table.

Administration: A-rated means that S&P assigns the company’s bonds a rating of A- or higher, and assigns the company’s common stock a rating of B+/M or higher. It also means that debt levels are reasonable. So, in a setting of negative Tangible Book Value it is unreasonable for a company to be capitalized more than 50% with debt or to have total debts greater than 2.5 times EBITDA. Exclude financial stocks and stocks that have been traded on public exchanges for less than 20 years. Select only from DJIA stocks that are held in both of these portfolios: Vanguard High Dividend Yield ETF (VYM) and iShares Russell Top 200 Growth ETF (IWY).

Bottom Line: Market volatility is the key concern for investors who plan to maintain their lifestyle during retirement. So, you might as well make money off it. That means automatically buy low (through dollar-cost averaging) whenever the market collapses, and automatically take advantage of mean regression while you’re at it. In other words, use dollar-averaging to buy shares in high-yielding companies for nothing by using a DRIP (dividend reinvestment plan), where dividends pay dividends on previously reinvested dividends. 

Risk Rating: 5 (where 10-yr US Treasury Notes = 1, S&P 500 Index ETFs = 5, and gold = 10).

Full Disclosure: I dollar-average into PG, JNJ and CAT, and also own shares of MRK, CSCO and MMM

The 2 and 8 Club" (CR) 2017 Invest Tune All rights reserved.

Post questions and comments in the box below or send email to: