I don’t understand how people can get all revved up about watching the World Cup on television. I Tivoed the match between the United States and Ghana.
More than 90 minutes and just three goals?
This is boring. And those vuvuzelas!
As much as I would like to see more scoring, it seems the World Cup is all about defense. (Poor defense is why the U.S. lost to Ghana.)
And defense has been the order of the day not only in the World Cup but in the financial markets as well. On June 3, I warned IDE readers about a “June Swoon.” I wrote:
“Over the last 20 years, the DJIA has been down 60% of the time in June. Couple June’s bad reputation with all the problems around the world, and you have all the reasons you need to build in a little protection for your stock portfolio.“
My specific recommendations were to short the S&P 500 index SPDR (SPY) or to buy an inverse S&P fund. Congratulations to all the IDE readers who followed my advice. Today, you are sitting on gains instead of losses for the month of June.
So what lies ahead?
No one knows for sure, of course, but it looks like it’s going to be a bear market. The market is now off 14.5% from its high on April 23. According to Bespoke Investment Group, there have been 32 declines of 14.5% or more from bull market highs since 1927. Only seven of them did not decline further (down 20% or more) and turn into a bear market.
Playing Defense
As a result of the market’s weakness, many investors have been flocking to Treasuries – despite the fact that we now have a national debt of over $120 trillion. (See IDE 6/28.) And despite the fact that the two-year T-note is yielding under 0.6%, the five-year note is under 2%, and the 30-year long bond is under 4%.
Don’t get panicked into buying government debt. The long-term agenda in the U. S. is to destroy wealth by way of inflation. You need to own companies that create wealth and have done so for decades. I’m talking about quality dividend-paying companies. And right now, they are on sale.
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Big Stocks Are Undervalued
Big companies are trading at the steepest discount to small companies since at least 1982, according to portfolio manager Thomas Perkins. His Perkins Mid-Cap Value Fund beat 94% of the competition over the past 10 years by investing in mid-size companies. Where is he invested now? Not in mid-caps. He prefers quality big names like Cisco and Walmart.
“Quality stocks are pretty damn cheap,” says Ben Inker, the director of asset allocation at the investment firm GMO. He goes on to say that “blue chips will outperform by an especially wide margin in turbulent times because they are more stable and better able to withstand shocks.”
And in his April newsletter, legendary investor Jeremy Grantham said it’s nearly certain that the highest-quality large stocks will outperform the market in the next seven years.
Since the bottom of the market in March 2009, many dividend-paying stocks have underperformed growth stocks that pay small or no dividends. But according to John Snyder, executive vice-president of Sovereign Asset Management, that’s about to change. “2010 is a different story,” he says. “Now we’re going back to fundamentals and valuation that meant nothing in 2009.”
Why Dividends Are Important
In a search for quality, stocks with dividends are a good yardstick. You can’t fake a dividend. Dividend payers tend to have strong balance sheets and time-tested business models. As Ben Inker says, “If Greece blows up, will that drive Coke into bankruptcy?“
Dividend payers deliver downside protection in a choppy market, as you can see in the chart below.
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Where to Invest
Standard & Poor’s has a list of companies they call their “Dividend Aristocrats.” These are blue-chip companies that have increased their dividends every year for at least 25 years. You can find the list here.
It’s not a bad place to start as you begin to assemble your dividend-paying portfolio. But in the end, it’s just a list of 43 companies that cleared the S&P dividend screens. If you are looking for dividend-paying companies that have been more thoroughly researched, I urge you to subscribe to Sound Profits.
Our analysts have been following dividend payers and growers for years. And by subscribing now, you can also receive my report on an intriguing silver discovery.
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