by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Wednesday, March 28, 2012: Issue #1739
On Sunday, I was on a plane traveling across the country. With lots of time on my hands, I did something I haven’t done for years. I read every section of the Sunday New York Times. It was a great way to spend the day as the hours on the plane just flew by.
One article, in particular grabbed me. Paul Lim discussed whether or not we were in an old bull market or a new bull market.
To sum up the arguments, they went like this:
Old bull – In order for a bull to become a bear, the market has to drop 20% on a closing basis. The largest decline (on a closing basis) since the bull started in March 2009 was 19.4%. Therefore, the bull is still in effect.
New bull – On October 3, the market was down 20% from the highs on an intraday basis (though it didn’t close that low). Additionally, over the past six months, small cap stocks have outperformed large caps. That is typical behavior of new bull markets.
I say it’s all bull.
Not that I don’t believe we’re in a bull market. I do…
It’s just that I don’t really care whether we’re in a new or old bull market. It’s not going to impact my investing decisions or recommendations.
In my active trading services, I’m going to react to the market that’s right in front of me. I’m not going to try to figure out if we have a few months or a few years of the bull ahead.
In the Ultimate Income Letter’s Perpetual Income Portfolio, which is designed to generate a high level of income both now and over the long term, I don’t worry about bulls or bears – just great stocks with a track record of raising their dividend payments year after year, providing members with more income than they received the year before.
Investors in The Oxford Club’s Gone Fishin’ Portfolio also don’t concern themselves with whether the market is in a bull or bear phase. The positions in that portfolio have consistently beaten the market for years, during all kinds of cycles and environments.
It is incredibly difficult to time the stock market. Even those “experts” who made great calls right before the markets tanked haven’t been able to duplicate their previous success. When was the last time you heard from any of the prophets who correctly called the ’87 crash?
Trying to time the market, particularly with your long-term portfolio is a fool’s game. Instead, here is a time tested (yet underappreciated) method for riding out volatile markets.
Perpetual Dividend Raisers
Look for stocks that are what I call “Perpetual Dividend Raisers”. These are stocks that have a track record of raising the dividend every year. For most stocks, that will keep ahead of inflation and the high yield will provide a buffer in a market downturn.
For example, let’s say you’re invested in Darden (NYSE: DRI), the operator of Olive Garden, Red Lobster and LongHorn Steakhouse restaurants. It currently pays a 3.4% dividend yield. Darden has raised the dividend every year for seven years. Over the past five years the average raise was 28% per year.
If the company’s dividend growth rate slows down to 14% per year, the yield would still climb to 5.6% in five years and swell to 10.7% in ten years.
And if you don’t need the income today and can reinvest those dividends, the numbers get even more impressive. Assuming the stock performs according to the historical average of the stock market, your yield would grow to 6.5% in year five and 15.9% after a decade. Even more impressive is that your compounded annual growth rate would be 11.5% after five years and 12.2% after ten.
But what if one of these market prophets calls for the end of the bull market and is right? What happens to your Darden shares then?
As long as the company continues to raise the dividend, the yield numbers mentioned above will stay the same. And there’s no reason to think they can’t do it. Darden even raised the dividend significantly during the Great Recession of 2008 – 2009.
If the stock market experiences a protracted bear market, you can still make a lot of money on your Darden stock by reinvesting the dividends.
As the market falls, reinvested dividends buy more stock. So if the market fell 5% per year every year and you had invested $10,000 in Darden, you’d be down about $100 after five years (not bad considering the overall market would be down by 25%. However, after ten years, you’d be up over $4,000 because of the power of compounding dividends, particularly when shares are cheap.
So for an investor who is reinvesting dividends, as long as they don’t need to sell anytime soon, a bear market is actually their best friend.
Owning Perpetual Dividend Raisers and especially reinvesting those dividends allows you to ignore all of the chatter about bulls and bears as your portfolio will grow no matter which creature is in control of the market.