In a recent newsletter, I made the analogy that you should visualize your investments like a grove of money trees, each producing fruit for you (in the form of dividends and/or options premium income) with the occasional storm bending, but not breaking the trees themselves. I want to offer up another analogy for your investment portfolio with the goal of your having a different, more objective perspective on how your hard earned money is invested and why.
With US stocks trading near all-time highs and the current bull market lasting a record 3,458 days, plus or minus, without a 20% or more decline, it is more important than ever to prepare both emotionally and financially for when, not if, the next bear market hits. No, we still can’t predict when this will occur (ponder all the money that has been lost sitting on the sidelines or worse yet betting against – or shorting – this market), and no it won’t be ‘different’ this time. At some point, for a specific reason or no discernable reason at all, the event many analysts have been predicting daily since 2013 or prior (the DOW was trading for under 6,500 in 2009, it’s now over 26,000) will occur. And many will be surprised, taken off guard, totally unprepared, and reacting on an in the moment emotions-based way, even though they ‘expected’ it every day for years.
Another way to consider the structure of your investment portfolio is akin to running. If you need to flee a burning building, you don’t warm up, you don’t take your time, you don’t worry about pacing yourself; you sprint as fast as you can to safety for the few seconds necessary. Conversely, if you are embarking on a marathon, you get to the starting line early, you do a thorough warm up, you start the race easy (if you’re smart), you check your interval times periodically but not every two minutes, you know you will have moments of elation and physical despair along the way (they don’t call it the “wall” at 20 miles for nothing), but you are in it for the long haul – to get to the finish line in one piece.
Your portfolio make up is similar – you have some proverbial sprints, and select ultra-marathons. As we have espoused repeatedly, for near-term needs (the ‘short race’) being defined as certainly within the next year, or preferably the next 2–3 years, money should be invested in short-term instruments that are largely unaffected by the ups and downs of the stock market. That way you can sleep well at night assured that regardless of where the market goes in the near term, you are covered. You have properly aligned your time horizon (your near-term cash needs) with your investments.
Conversely, for funds you don’t need for 3 plus years (everyone’s circumstances are different in terms of what the optimal time horizon is – see us to discuss your particulars), medium to longer-term investments are appropriate. Another record was recently broken, that of the longest streak for the DOW in correction territory (how long it takes to recover from a 10% or more – but less than 20% - decline). The longest such period before? 223 days, in 1961. The average period of time to recover from a correction is about 4 months. The typical bear (20% or more decline) market subsides in under 18 months. This is why we use the time frame of 2 – 3 years for money considered to be medium to long term.
For funds you don’t need for several years, again the short-term ups and downs of the market are of no concern. Near-term declines actually benefit you to the extent you own dividend paying stocks, as each dividend paid at a lower price buys more shares which typically lead to higher future income and returns. Under this scenario, the probability is very high that stocks will recover before you need the money in cash form. It is similar to a marathon – your goal is to get across the finish line 26 miles away, your time minute to minute is not of concern. Fact checking it too frequently may lead to bad decisions, just like those who examine stock prices too often tend to sell in a panic when doing nothing would have been the best course of action. Of course time passes, so a 5 year time horizon will soon be a 1 year time frame (to purchase a new house, retire, enter college, etc.) which is why portfolio construction and asset class (stocks vs. bond vs. cash, etc.) selection should be regularly monitored and adjusted as circumstances change.
The Big MO - The Importance of Dividends for Short-Term Peace and Long-Term Returns
Altria Group (MO) has experienced its own bear market lately, the stock declining from a high of over $77 per share to around $53 this year (a drop of nearly 30% which exceeds the definition of a bear market). A total disaster? It certainly would be for anyone needing the cash during that period (and thus selling on weakness), or more to the point if MO didn’t pay a dividend. But let’s look closer at MO’s fundamentals, with a focus on its dividend.
During this ‘terrible’ run for MO (if DOW dropped the equivalent 30% that would be a nearly 8,000 point plunge), the company has increased its dividend multiple times from $0.61 per share in 2017 to $0.66 later that year (an over 8% increase) to $0.70 per share shortly thereafter in March of this year. If that weren’t enough, less than 6 months later the company increased its dividend yet again, this time a whopping 14.3% to $.80 per share. That is a nearly 32% increase of an already robust dividend in about 18 months. The stock currently yields around 5.47%, nearly double that of the 10-year treasury, and this company which has paid dividends since 1928 is expected to keep increasing the money it sends to shareholders every 90 days well into the future.
So while on the surface MO’s precipitous decline seems like a negative thing, for those with an appropriate time horizon, the near-term decline combined with ever growing dividends being reinvested for more shares regularly is a potential boon. It certainly makes it easier to sleep at night knowing that MO has enough confidence in their future to be aggressively increasing its dividend – an important source of returns above and beyond near-term price appreciation.
This is why we emphasize best-of-breed, blue-chip value dividend-paying stocks, as a core of one’s portfolio. They may not be sexy during raging bull markets, but they will help you get through the inevitable downturns that hit from time to time – the storms that impact the forest temporarily, or that heartbreak hill at mile 19 of the marathon.