Situation: We all have occasions when we need to use our Rainy Day Fund to meet non-recurring capital expenditures. Afterward, we hope that our regular contributions will replenish it before we’re blind-sided again. That Fund needs to have some dividend-paying stocks in it, as well as inflation-protected Savings Bonds that can be cashed anytime without risk of loss (at treasurydirect). Why stocks? If chosen well, they’ll grow in value somewhat faster than Savings Bonds, as long as dividends are automatically reinvested. But when the market is down, you don’t want to sell those stocks at a loss. Instead, a better choice is to cash in some Savings Bonds. But the kind of “safe” stocks that are suitable for the Fund don’t grow very fast, so you need to 1) minimize expenses by using an online dividend reinvestment plan (DRIP), and 2) find DRIPs that are cost-free.
The trick is knowing which stocks to pick. This week’s Table has one stock for each of 4 essential industries: healthcare, consumer staples, utilities, and energy. Those 4 stocks are: Abbott Laboratories (ABT), Procter & Gamble (PG), NextEra Energy (NEE) and Exxon Mobil (XOM). In the next bear market, these should hold their value relatively well. DRIPs for all 4 can be obtained through computershare at essentially zero purchasing cost. There are no fees for either the initial set-up of automatic monthly purchases or for dividend reinvestment. Well, there is one exception to that bold statement. Procter & Gamble has a “processing fee” of two cents a share for purchases. The minimum amounts permitted for each automatic monthly investment are: $25 for ABT and inflation-protected Savings Bonds, $50 for XOM and PG, and $100 for NEE. If you make automatic $100 monthly purchases for each, your expense ratio for the year is going to be $0.24/$6000 = 0.004%, which we consider to be negligible. The Savings Bonds you’re accumulating through automatic monthly investment at treasurydirect are not only cost-free but come with tax advantages identical to those of an IRA (along with the same limits on annual purchases).
Bottom Line: Build a resilient and rewarding Rainy Day Fund. The one I’ve described here has the advantage of being cost-free. Peruse the Table for details, and note that red highlights denote underperformance vs. our favorite benchmark for retirement savings, which is the Vanguard Balanced Fund (VBINX). You’ll see that the Rainy Day Fund performs quite well (Columns C & F in the Table) and carries little risk (Columns D & I in the Table) compared to VBINX. However, the Rainy Day Fund won’t keep up with VBINX in a bull market because it designed for safety, not wealth-building.
Risk Rating: 3
Full Disclosure: This is the Rainy Day Fund that I currently employ.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 3
Week 161 - Food Processors That Stock Grocery Store Shelves
Situation: I think we’ve all become a little bit leery of the current stock market. Market analysts keep anticipating GDP growth of 3% but the International Monetary Fund projects that GDP growth in the US is only going to be 1.6% for 2014, and Janet Yellen (the new Chairperson of the Federal Reserve) says that our economy won’t return to 3% GDP growth until 2016 at the earliest. Investors have responded by again sheltering in safe harbors like companies in the 4 “defensive” S&P Industries. Those would be: Consumer Staples, Healthcare, Utilities, and Communication Services. That means those stocks are overpriced according to their Price/Earnings ratio--price divided by earnings over the past 4 quarters (P/E) has moved into the danger zone. P/E ratios higher than 20 are considered too high because returns to the investor drop below 5%/yr. When returns from “defensive” stocks fall that far, professional investors will start to cut their risk profile by moving money into corporate bonds, e.g. Vanguard’s Intermediate-Term Investment-Grade Bond Fund (VFICX, see Table).
This week, our task is to look at the safest sub-industry (after regulated utilities) within the 4 defensive industries: Food Processors. To get a clear picture, we’ve included all 20 of the publicly-traded companies that stock your grocery store’s shelves to a material degree and have long-term trading records (see Table). The first column of data (Col C) tells the story. All 20 have total returns that equal or exceed that of our benchmark, the Vanguard Balanced Index Fund (VBINX, see Table), which has returned a little over 5%/yr since the most recent inflation-corrected peak in the S&P 500 Index occurred on 9/1/00. Because it’s hedged, VBINX performed better than the lowest-cost S&P 500 Index fund (VFINX in Table). Risk for the 20 aggregated food processors (Line 22 in the Table), as measured by both total return over the 18-month Lehman Panic panic period and 5-yr Beta (Columns D & J), was less than for VBINX even though total returns after both 14 yrs and 5 years were much greater (Columns C & F).
Now that we’ve got your attention, let’s “muddy the waters.” Look at the Table and note that only PEP, GIS, and SJM provide the investor with what she wants, which is to be at least as good as VBINX in terms of performance (Columns C, F, G, H, I) as well as safety (Columns D, J, K, M, N, O). The aggregated data on Line 22 look great but you’ll need stock-picking skills to capture those high returns at low risk. Remember: data points that underperform VBINX are highlighted in red. Column K (P/E) has an abundance of those, indicating that the market is pricey.
Bottom Line: Food Processors are a mother lode of opportunity for investors but that sub-industry is highly fragmented. Out of the 20 companies in the Table, only 5 are sizable: Nestle (NSRGY), Danone (DANOY), Mondelez International (MDLZ), Coca-Cola (KO) and PepsiCo (PEP). But size (Col L) and bond ratings (Col O) don’t matter much when a company is selling an essential product. The exception occurs when government regulation imposes price controls, as is the case with milk, e.g. Dean Foods (DF at Line 17 in the Table), which is the largest milk producer in the US.
How should you prioritize your research into the “story” that supports the market value for each of these stocks? We suggest that you assign the same priority as the PowerShares Dividend Achievers Portfolio (PFM, Line 36 in the Table), an exchange-traded fund or ETF. That priority is: KO, PEP, GIS, HRL, SJM, MKC, FLO, LANC.
Risk Rating: 4
Full Disclosure: I don’t plan to purchase any stock listed in the Table, but do own shares of MKC, KO, HRL, GIS, and PEP.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
This week, our task is to look at the safest sub-industry (after regulated utilities) within the 4 defensive industries: Food Processors. To get a clear picture, we’ve included all 20 of the publicly-traded companies that stock your grocery store’s shelves to a material degree and have long-term trading records (see Table). The first column of data (Col C) tells the story. All 20 have total returns that equal or exceed that of our benchmark, the Vanguard Balanced Index Fund (VBINX, see Table), which has returned a little over 5%/yr since the most recent inflation-corrected peak in the S&P 500 Index occurred on 9/1/00. Because it’s hedged, VBINX performed better than the lowest-cost S&P 500 Index fund (VFINX in Table). Risk for the 20 aggregated food processors (Line 22 in the Table), as measured by both total return over the 18-month Lehman Panic panic period and 5-yr Beta (Columns D & J), was less than for VBINX even though total returns after both 14 yrs and 5 years were much greater (Columns C & F).
Now that we’ve got your attention, let’s “muddy the waters.” Look at the Table and note that only PEP, GIS, and SJM provide the investor with what she wants, which is to be at least as good as VBINX in terms of performance (Columns C, F, G, H, I) as well as safety (Columns D, J, K, M, N, O). The aggregated data on Line 22 look great but you’ll need stock-picking skills to capture those high returns at low risk. Remember: data points that underperform VBINX are highlighted in red. Column K (P/E) has an abundance of those, indicating that the market is pricey.
Bottom Line: Food Processors are a mother lode of opportunity for investors but that sub-industry is highly fragmented. Out of the 20 companies in the Table, only 5 are sizable: Nestle (NSRGY), Danone (DANOY), Mondelez International (MDLZ), Coca-Cola (KO) and PepsiCo (PEP). But size (Col L) and bond ratings (Col O) don’t matter much when a company is selling an essential product. The exception occurs when government regulation imposes price controls, as is the case with milk, e.g. Dean Foods (DF at Line 17 in the Table), which is the largest milk producer in the US.
How should you prioritize your research into the “story” that supports the market value for each of these stocks? We suggest that you assign the same priority as the PowerShares Dividend Achievers Portfolio (PFM, Line 36 in the Table), an exchange-traded fund or ETF. That priority is: KO, PEP, GIS, HRL, SJM, MKC, FLO, LANC.
Risk Rating: 4
Full Disclosure: I don’t plan to purchase any stock listed in the Table, but do own shares of MKC, KO, HRL, GIS, and PEP.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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