Ignore Market Volatility—Build Holdings in these Five “Forever” Stocks
By Vita Nelson, Moneypaper and DirectInvesting.com
Wall Street’s Best Editor’s Note: Vita Nelson began her Wall Street career as a bond trader where she “made a market” in municipal bonds. She established Moneypaper, the first financial newsletter for women, and in 1984, when she learned that it was possible to invest directly in the market and bypass the brokerage industry, she began using her skills and expertise to bring information on Dividend Reinvestment Plans to the investing public. Vita has been a long-time contributor to our publications, and is a great proponent of long-term investing in fundamentally strong companies.
It was Benjamin Graham who first differentiated between “investors” and “speculators” in his classic book, The Intelligent Investor.
While market timing is of great importance to speculators, investors do the boring fundamental analysis, develop a solid long-term investment plan, choose investments for their value rather than popularity, invest with a margin of safety, and stick with their plan regardless of temporary market fluctuations caused by “Mr. Market.”
Their goal is to preserve their investment capital and generate some income from their holdings rather than to focus on share price appreciation for profits. Daily fluctuating share prices can be largely ignored because, in reality, the underlying value of a company doesn’t vary that dramatically from day to day.
Graham emphasized the virtues of a simple portfolio of value companies and his overall message for the ‘intelligent investor’ is that the real money is not made by buying and selling or timing the market, but by owning and holding securities and receiving dividends that grow in value over time.
While not around in 1949 when Graham’s book was published, Direct Investment Plans or Dividend Reinvestment Plans (DRIPs) are the perfect investment vehicle for ‘intelligent investors’ to preserve their investment capital and generate income that grows over time.
Investing through DRIPs achieves those goals on many levels. DRIPs make it easy to make regular dollar amount investments (instead of buying a certain number of shares) to build your holdings at a variety of price points—your predetermined dollar amounts buying more shares when prices are low and fewer when they are high. They also offer the advantage of making it more difficult to trade. You can’t just click a link and sell.
Often investors react emotionally to market volatility. It’s not easy to hold on when you see the value of your holdings plummet. More logical investors can take advantage of such opportunities to buy at affordable prices.
At Moneypaper, we are not in the business of making specific stock recommendations or projecting daily market predictions. That’s because we believe that real wealth is built by approaching the market logically. That is, by devising a strategy that will work over the long term and sticking with it. One or two “hot” stocks just won’t cut it—even if we thought that we could recommend a specific stock for a specific time period with 100% surety.
With this, you should understand that any stock selections we provide should not be viewed as a stock pitch. Our purpose in highlighting a specific company is to point out that the company offers a DRIP and to suggest that it is “worth a look” for inclusion in your well diversified portfolio because the company meets the following criteria:
• The company is a solidly established industry leader,
• The company is shareholder-friendly with a long
history of paying, and even raising, regular dividends, and
• The company does not charge a fee for investing through its DRIP.
We believe that the chances are good that the companies that we profile in Moneypaper will continue to provide the products or services that have brought them acclaim in the marketplace and allowed them to consistently pay a dividend to their shareholders.
Here is a five-stock portfolio that may be a good starting point. To qualify for this list, the company must have a long history of dividend increases. We also took into account the sustainability of those dividends and the amount of yield it was providing. We kept total return in mind, looking for companies with excellent earnings and dividend growth rates, as well as sustainable business models.
Since investment amounts are likely to be small to start, we limited our selections to companies that do not charge fees for investing through the plan. We also sought to diversify the companies in terms of industry. The companies that met these conditions are listed below.
By “saving” in the stock of companies such as the ones in this portfolio (instead of in a bank savings account), investors have the opportunity to participate in the growth of the economy in the most efficient manner possible.
Aflac (AFL) is a leading insurer that’s maintained after-tax operating margins of over 10% since 2007. An extremely investor-friendly company, Aflac has paid increasing dividends for 35 consecutive years raising their dividend by 5.1% in 2015.
Johnson & Johnson (JNJ) has a market capitalization of about $280 billion and its business is split between drugs, medical devices and products on one hand and consumer goods like Band-Aids, Baby Shampoo, and topical medicines on the other. The dividend has been increased for 54 consecutive years.
International Paper (IP) is the dominant company in the area of paper and packaging, both in the U.S. and abroad, with almost $23 billion in annual sales and a market capitalization of about $16.5 billion. With a yield of about 4%, it has raised its dividend for 6 straight years (and its latest increase was 10%).
General Mills (GIS) is a major food processor with products like Big G and Chex cereals, Yoplait, and Pillsbury. The dividend has been increased for 13 straight years and has never been cut in the 114 years that the company has been paying them.
ExxonMobil (XOM) is the largest oil company that resulted in the breakup of the old Standard Oil conglomerate (at $333 billion market cap) and routinely logs the largest annual profits of any American company. Its dividend has been increased for 34 straight years.
DRIPs allow you to invest in a widely diversified portfolio of high-quality companies and continually build up your holdings over time. When you invest directly through company-sponsored DRIPs, you build wealth steadily over time without the constant need to pay attention to any swings in the market.
In fact, investing in this manner makes market volatility work for you. How so? By accumulating shares through investing the same dollar amounts regularly, the average cost of your shares will turn out to be even less than the average market price that those shares were selling for during the period you invested.
These are just a few of many tried and true companies that offer a DRIP. And many of these companies offer investors the opportunity to invest directly in their company-sponsored DRIP without paying any broker commissions or fees of any kind. Here’s a link to no-Fee DRIPs that have raised their dividend payouts for 25+ years.
Vita Nelson, Moneypaper, www.directinvesting.com 914-925-0022
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks