Don’t Trade Your Stocks So Often

Selling is Bad?

Dividends are Good

PepsiCo (PEP) and Royal Bank of Canada (RY)

How often do you trade your stocks? Do you turn over your portfolio an average of once a year, twice a year or twelve times a year? In this age of super-fast computers that are programmed to trade in nanoseconds, should we trade more often to keep up with the ever-changing stock market?

Mark Hulbert, founding editor of the Hulbert Financial Digest, has been tracking investment letters for a good many years. His Digest follows the investment performance of hundreds of investment advisory newsletters. The reports provide investors with a reliable source to determine which newsletters are offering good advice and which newsletters are not.

Hulbert and his staff recently compiled a huge database to determine how the frequency of portfolio transactions impacted performance results. He used more than three decades of history from hundreds of newsletters.

For each newsletter, Hulbert and his staff compared how a newsletter’s portfolio actually performed in each year against how the portfolio would have performed if the portfolio recommendations remained the same (frozen) from the beginning of each year to the end of each year.

Since the early 1980s, two-thirds of the portfolios would have performed better by not buying and selling during each year. Furthermore, in EVERY year the frozen portfolios performed better than their actual portfolio counterparts that included trading during the year.

In 2010, for example, the 500 model portfolios that Hulbert Financial Digest tracks gained an average of 14.6%. Not bad, compared to the Standard & Poor’s 500 Index gain of 12.8% in 2010. However, if the 500 model portfolios had been frozen at the beginning of 2010 with no transactions allowed, the resulting gain would have been 18.0%. Wow!

An additional study lends credence to Hulbert’s findings. Finance professors Terrance Odean of the University of California – Berkeley and Brad Barber of the University of California – Davis, studied the trades made in 10,000 randomly selected accounts at a major discount brokerage firm between January 1987 and December 1993.

Odean and Barber’s study focused on cases in which investors bought a stock less than 30 days after selling another. The researchers found that over the 12 months following the transactions, the stocks that were sold performed 3.2% better than the stocks that were bought. Investors would have been better off had they done nothing.

So the sixty-four thousand dollar question is: How often should we trade our stocks? There is no answer, because it all depends on the type of stocks. I am a conservative investor, so I tend to hold onto my stocks for about 18 months on average.

The data and studies seem to suggest that the longer you hold, the larger the profit. I advise using sell targets with the goal of achieving maximum gains within two years. Sounds idealistic, I’m sure, but if half of my stocks reach their targets, I will easily beat the market.

Holding stocks for longer periods of time has another benefit–receiving dividends! Dividends are the regular cash payments that a company sends to you or your brokerage account. You can, however, instruct the company or your broker to reinvest your dividends into additional shares or fractional shares.

Dividends are the payments of a company’s hard-earned profits. A company’s ability to continually pay dividends provides concrete evidence that the company is performing well. And accounting malfeasance is harder, sometimes impossible, if a large transfer of cash is going to shareholders on a regular basis.

When looking for good companies that will provide above-average stock-price appreciation and increasing dividends, I look for several factors. These factors include strong balance sheets with low debt and lots of cash. I prefer companies that have paid dividends for decades where increases are common. And I check to see if the company is likely to continue to grow during the next several years.

Two companies that fit my criteria are Pepsi and Royal Bank of Canada. Both offer excellent appreciation potential and rising dividends.

PepsiCo (PEP), incorporated in 1919, is a global leader in the soft drink and snack food industries.  Pepsi’s popular brands include Pepsi, Frito-Lay, and Quaker Foods (acquired in 2001).  Pepsi derives 65% of total sales from North America while international sales are spread throughout the remainder of the world.  The company is beating its competition by expanding in international markets and focusing on health and wellness beverages and foods.

PEP management has created faster growth by reacting more quickly to new growth trends in the industry.  Bottled water (Aquafina), fruit juices (Tropicana and Naked Juice), and nutritious snacks (Quaker oatmeal and granola bars) are growing noticeably faster than traditional carbonated soft drinks and conventional snack foods.

I expect Pepsi to increase sales, earnings and dividends 10% or more during the next five years. New products and further expansion into emerging markets will spur future business. PepsiCo’s purchase of Wimm-Bill-Dann, a leading Russian dairy company, will diversify its product portfolio and extend its global reach. The stock is reasonably priced at 14.7 times my 2012 earnings per share estimate. Dividends have been paid since 1952 and currently provide an attractive yield of 3.3%.

Pepsi is a top-notch company in a stable industry.  I expect PEP shares to advance at a steady pace during the next two to three years as the company rolls out new products, acquires companies with good growth potential, and gains market share overseas. Buy PEP.

Royal Bank of Canada (RY), founded in 1864 in Toronto, Ontario and also know as RBC, is the fifth largest financial institution in North America and the largest bank in Canada. RY offers all types of banking and investment services to individuals and businesses through its 1,700 branch offices in Canada and 400 branches in 30 foreign countries.

The Canadian economy has performed much better than the U.S. economy and many foreign economies during the past three years. Canadian banks were not allowed to sell risky loans or buy unsafe investments. The housing market remains solid, economic growth continues to climb and the nation’s debt remains low.

RY will sell its 420 U.S. branches and its U.S. banking network to PNC for $3.5 billion. The sale will enable RY to expand its Canadian operations and to make strategic acquisitions at home and abroad.

Royal Bank’s earnings and dividends per share will likely increase 11% per year during the next five years. The healthy Canadian economy will help Royal Bank to register an EPS increase of 11% in 2012. At 12.5 times our forward 12-month EPS forecast, RY shares are undervalued. The recently increased dividend now provides shareholders with a decent yield of 3.9%. The high yield will limit stock price erosion. Buy RY.

Until next time – be kind and friendly to everyone you meet.


J. Royden Ward
Editor of Cabot Benjamin Graham Value Letter

Editor’s Note: You can receive continuing coverage of Pepsi and Royal Bank of Canada in my Cabot Benjamin Graham Value Letter. There you’ll not only find buy and sell advice for Pepsi and Royal Bank of Canada, you’ll get 20 other excellent value stock recommendations from me each and every month. I will tell you exactly when to sell, too. Don’t miss out on my next recommendations … click here now to get started today!

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