Sizemore Capital Management is a fee-based Registered Investment Advisory firm based in Dallas, Texas offering investment planning and money management services to individuals, families and institutions.
There’s an old Wall Street saying that goes, “Bulls make money, bears
make money, pigs get slaughtered.” No one really knows who originally
said it, but its meaning is clear. You can make money in a rising market
or a falling market if you’re disciplined. But if you hunt for stocks
to buy while being greedy, sloppy and impatient, things might not work
out as you hope.
This is a time to be patient. We’re more than a decade into a truly epic bull market that has seen the Standard & Poor’s 500-stock index appreciate by well over 300%. While value investors might still find a few bargains out there, the market is by most reasonable metrics richly valued.
The S&P 500’s trailing price-to-earnings ratio sits at a lofty
21. The long-term historical average is around 16, and there have only
been a handful of instances in history in which the collection of
blue-chip stocks has breached 20. It’s expensive from a revenue
standpoint, too — the index trades at a price-to-sales ratio of 2.1,
meaning today’s market is priced at 1990s internet mania levels.
The beauty of being an individual investor is that you reserve the
right to sit on your hands. Unlike professional money managers, you have
no mandate to be 100% invested at all times. You can be patient and
wait for your moment.
Here are 13 solid blue-chip stocks to buy that look interesting now, but will be downright attractive on a dip. Any of these would make a fine addition to a portfolio at the right price. And should this little bout of volatility in May snowball into a correction or proper bear market, that day might come sooner than you think.
The Centers for Disease Control and Prevention announced that the
number of American live births dropped to 3,788,235 in 2018. That’s a 2%
drop from 2017, and a 12% drop from the 2007 high. It puts us back at
levels last seen in 1986.
But the numbers look worse when you drill down.
population today is around 330 million. It was around 240 million in
1986. So, we’re producing the same number of babies despite having a
population nearly 40% larger.
Our birth rate is now approximately
1.7 children born per woman, which is well below the replacement rate of
2.1. We still have a steady flow of immigration, and immigrants tend to
be relatively young. They help balance out the workforce with lower
birth rates. But unless something changes — which is difficult given
that the largest cohort of Millennial women are aging out of peak
childbearing years — we’re looking at a lost generation.
Millennial women aren’t much better. About 35% of Millennial women live
with a partner, whereas about 29% still live with their parents.
These aren’t college kids, by the way. The largest chunk of Millennials are now in their late 20s to mid 30s.
could blame student debt or the high cost of housing. We could blame
the low starting salaries for young people, or a college educational
system that produces graduates without much in the way of technical
skills. We could blame smartphones, the addiction to social media, and
the change in day-to-day communication and relationships.
this isn’t just an American phenomenon. Japan is essentially becoming
asexual at this point. A recent study found that 70% of unmarried men
and 60% of unmarried women aged 18-34 were not in a relationship, and
over 40% in that age group had never had sex at all.
The world seems to be losing its animal spirits, and we’re going to feel the impacts.
Rodney Johnson wrote about this Economy & Markets,
focusing on the effects it has on workforce growth and government
funding. And he’s right. A social welfare system needs a steady supply
of young people to support the elderly in retirement, and businesses
need young workers.
But of all the consequences of a low
birthrate, I’m least concerned about labor. Our economy has been
replacing workers with machines for my entire lifetime.
I’m far more concerned with who’s going to be swiping the credit cards of the future.
It’s More Than Just the Loss of Labor…
since the dawn of the Industrial Revolution, the economy has been an
exercise in producing more goods and services for more people. Whether
we’re talking about cars, houses, simple jeans or complex iPhones, the
story is the same: an ever-growing population consumes a growing
production of “stuff.”
But what happens when the population stops
growing? There’s not much point in building new homes or offices if
there are fewer people to put in them. Where do new flat screen TVs go
if there are no new walls to hang them on?
At some point, the
economy starts to look like an enormous Ponzi scheme that needs a
continuous flow of new people to keep it afloat.
Now, I’m not one
for all the doom and gloom. And I’m not predicting any kind of zombie
apocalypse. Life will go on. But it’s not going to be the kind of
economy we grew up in.
It’s going to be an economy with slower
growth, one with much less dynamic, and will likely resemble economies
like Japan or Europe rather than a “traditional” America economy. One
that will be marked by chronically low inflation and even occasional
bouts of deflation.
It’ll be an economy that favors a different
kind of investing. One where income strategies will thrive and growth
will fail. With periods of slow inflation and low growth, a steady
stream of cash is a lot more attractive than times of fast revenue and
Today is a day to remember those who have fallen in the line of duty.
most of us though, it’s an excuse for the office to be closed and kick
off the summer by lounging around the pool, or grilling up some burgers
with friends and family.
There’s nothing wrong with that, of
course. I like to think that fallen warriors look down in approval
knowing that our way of life is made possible by their sacrifice. But we
shouldn’t take it for granted.
If you have children, take a minute to explain why today is significant. They need to hear it.
if you run into any veterans, give them a hardy pat on the back and
thank them. If they look thirsty, offer them a cold beer. It would be
uncivilized not to.
With the markets closed today, there’s not much to report. But I thought I would share parts of a letter I wrote to my younger cousin who just graduated from college with a degree in engineering.
I’ll refer to him as “W” to keep him anonymous. He starts his new job at Lockheed Martin next month, and we’re all really excited for him.
Congratulations on finishing your
degree and on getting the Lockheed job. That first job and getting your
career started on the right foot is really important. And you’re getting
yours starting right!
At any rate, let me give you a few parting words of advice.
With your first paycheck, have fun. Treat yourself to something
frivolous. Blow it. Enjoy it. And then, after that, it’s time to get
serious and be an adult. But blowing the first paycheck on something
stupid is a nice way to reward yourself for finishing your degree.
I don’t know what your living plans are, but living with your parents
for six more months will allow you to pad your savings. You should move
out pretty quickly, as that’s important to being a real adult. But
another 6-12 months at home won’t kill you, and it will allow you to
save up enough cash to buy a car or even make a down payment on a modest
house. Just make sure you actually save it and don’t just blow it all.
Open two checking accounts. One will be the account your paycheck goes
to and the account you use for your regular expenses. The other should
be for saving. You can tell Lockheed to split your check across two
accounts. They’ll do that. You can put 90% in the main account and 10%
in the secondary account, or whatever makes sense. But keeping that cash
separate makes it harder to spend.
Put AT LEAST enough of your paycheck into your 401(k) in order to get
the free employer matching. It’s literally FREE money. Ideally, you
should put a lot more. You can put up to $19,000 into a 401(k) annually
at your age. But at a bare minimum, put whatever you need to put to get
the employer matching. It’s just stupid not to.
Don’t get a credit card. Use a debit card or pay cash.
Avoid debt on anything other than a house or car, and even on the car
try to keep it minimal. Debt has ruined far more lives than drugs or
alcohol ever have.
Learn how to
cook. Or, if that is a lost cause, find a girlfriend who likes to cook
and treat her right and never let her go. Going out to eat all the time
will bankrupt you, and it’s terrible for your health. This is a lesson
best learned while you’re still young.
Try to exercise at least a couple days per week. You’ll regret it when you’re 30 (and more when you’re 40) if you don’t.
If your boss yells at you, don’t be a typical thin-skinned Millennial
and get offended. Keep the stiff upper lip and use it as an opportunity
to learn something and improve your marketability as an employee. I
learned FAR more from the mean bosses than the easy-going ones. The boss
who is your buddy isn’t going to get you anywhere. It’s the mean bosses
that toughen you up who help you advance.
Try to attach yourself to a manager that is really going somewhere in
the company. If you do good work for them, they’ll take you with them.
If you attach yourself to a manager who’s not really going anywhere,
neither will you.
And that’s it. This is the only real wisdom I’ve managed to acquire in the 20 years since I graduated.
Good luck in the new job, and let’s get the families together for some grilling this summer!
Happy Memorial Day, folks.
Do yourself a favor and turn off
your smartphone. The office is closed, and whatever it is you were going
to check can wait until tomorrow. Our fallen soldiers didn’t fight
tyranny only to have you enslaved by your iPhone.
So, put the phone away and be present with the people you love.
The late Sir John Templeton once commented that “the four
most expensive words in the English language are ‘this time it’s different.’”
No truer words have ever been spoken.
It’s true for degenerate gamblers, drug addicts and serial
womanizers. It’s true for politicians peddling failed policy ideas. And it’s
true for ne’er-do-well employees or business partners who can never quite seem
to get it together. No matter how many times they tell “this time it’s
different,” it never is.
But perhaps nowhere is the quote more appropriate than in
finance. This seems to be one area of human endeavor where people seem
constitutionally incapable of learning from past mistakes.
Making loans to uncreditworthy borrows? Banks seem to do
that about once every ten years like clockwork. In fact, they’re doing it now.
Delinquent auto loans recently hit a new all-time high.
Lend money to perpetual basket cases like Turkey or Argentina?
Bond holders seem to do that once per
decade or so as well.
And getting caught up in the latest, greatest bubble?
Yes, that seems to be a rinse and repeat cycle as well.
I pondered this as I read Barron’s
last Saturday, [CS1] as is my
weekly ritual. I wake up and play with my kids for an hour before making an
espresso and unrolling my issue of Barron’s.
for Barron’s, Adam Seessel of Gravity
Capital Management, commented that “reversion to the mean is dead.”
other words, the classic value trade of buying beaten down, out-of-favor stocks
and selling expensive hype stocks is over. Value investing no longer works:
As for returning to normal, does anyone really believe that is going to happen, for example, to Amazon.com or Alphabet? E-commerce and digital advertising still have only a small share of their global market, despite nearly a generation of growth. Other industries—ride-sharing, online lending, and renewable energy—are smaller still, but also show every sign of being long-term winners. How are these sectors going to somehow revert to the mean? Conversely, how will legacy sectors that lose share to these disruptors return to their normal growth trajectory?
Seessel isn’t some wild-eyed permabull growth investor. By
disposition, he’s more of a value investor. But after a decade of
underperformance by value investing as a discipline, he’s wondering if it
really is different this time.
It’s a legitimate question to ask. Not all trades revert to
the mean. Had you been a value investor 100 years ago, you might have seen a lot of cheap
buggy-whip stocks. But they ended up getting a lot cheaper as cars replaced
Likewise, might banks and energy companies today be at risk today
from new disruptors like green energy and peer to peer lenders? And will the
winners of the new economy just continually get bigger?
Well, maybe. Stranger things have happened. But before you start digging value investing’s grave, consider the
experience of Julian Robertson, one of the greatest money managers in history
and the godfather of the modern hedge fund industry. Robertson produced an
amazing track record of 32% compounded annual returns for nearly two decades in
the 1980s and 1990s, crushing the S&P 500 and virtually all of his
competitors. But the late 1990s tech bubble tripped him up, and he had two
disappointing years in 1998 and 1999.
redemptions, Robertson opted to shut down his fund altogether. His parting
words to investors are telling.
The following is a
snippet from Julian Robertson’s final letter to his investors, dated March 30,
2000, written as he was in the process of shutting down Tiger Management:
There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.
“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.
As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much…
I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.
The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds.
held on a little longer, he would have been vindicated and likely would have
made a killing. Tech stocks rolled over and died not long after he published
this, and value stocks had a fantastic run that lasted nearly a decade.
Today, I see
shades of the late 1990s. The so-called “unicorn” tech IPOs this year were Uber
and Lyft. Neither of these companies turns a profit, nor is there any quick
path to profitability. These are garbage stocks being sold to suckers at
I’ll stick with
my value and income stocks, thank you very much. And in Peak Income, we have a portfolio full of them.
This month, I
added a new pick offering a 7% tax-free yield. That’s real money, and I
don’t have to worry about selling to a greater fool.
Note from Charles: I worked with Bill Washinski for years when I was living in Florida, and we collaborated on several research projects. In the spirit of the upcoming Avengers movie. I enjoyed his piece here on “the economics of Thanos,” and I hope you do too. –Charles–
Tomorrow, April 24, Avengers: Endgame, the sequel to the $2 billion hit movie Avengers: Infinity War will be released in China, with releases in the rest of the world to quickly follow. This brings to a climax a story line that has been more than a decade in the making, starting with 2008’s Iron Man
In all of the anticipation, there has been a lot of discussion around social media and other outlets about Thanos and the merits his plan to eliminate half of the population of every planet in the universe with “The Snap”.
To some, Thanos isn’t a villain at all. He’s a misunderstood hero doing what needs to be done to save humanity from the consequences of overpopulation and the exhaustion of resources. Indeed, throughout history many (if not most) conflicts have been fought over limited resources. And in an era in which global warming is one of the biggest and thorniest political issues, there are plenty of people out there who believe a smaller population is ideal.
It stands to reason that the Earth probably has a finite carrying capacity. There may be some upper population limit at which we’ve officially outgrown our planet.
It was 18th century demographer Thomas Malthus who first popularized the idea of the Earth reaching its carrying capacity. Mathusianism stated that “the power of population is indefinitely greater that the power in the earth to produce subsistence for man.”
Thanos made the same point in Infinity War: “It’s simple calculus, the universe has finite resources and if life is left unchecked, life will cease to exist.”
However, despite his omnipotent power, Thanos is lousy statistician. Had he bothered to check, he would have seen that the birth rate has been in a state of free fall since the U.N. began keeping track of it in the 1950s. This is a product of industrialization, as children in the modern era are no longer a source of cheap labor but rather a major expense.
The birthrate was 37.2 Births per 1,000 from 1950-1955, dropping nearly in half to 19.4 Births per 1000 from 2010-2015. This has nothing to do with declining resources as much as it does economic factors – it can cost $200,000 – $300,000 to raise a child in the United States (not including the costs of college education). Massive improvements in infant mortality also played a role, as parents felt less needs to have “spare” children.
But not only is population growing at a slower rate; some countries are actually shrinking. Japan’s population started to decline in 2011, and the country had a record low 15 million births in 2018. Western European nations average only 1.6 children per woman, which is not enough to replace the existing generation. So, it is only a matter of time before Europe as a whole begins to shrink.
Thanos tried to “fix” a problem that nature and economics seems to already be fixing on its own. We’ve already moved past a point of maximum growth.
Let’s look at other aspects of Mad Titan’s madness. His cutting out half the population could have drastic negative effects. In the movie he references how another character’s home world was a paradise after he culled the population. This is a short-sighted view, that a smaller population with more resources to sustain them made it a better world, is incredibly naïve.
Imagine if Thanos came and did his snap before Henry Ford developed the assembly line for cars or before Alexander Fleming discovered penicillin? What if Bill Gates was turned to dust before he created Microsoft or Steve Jobs before he created Apple? What kind of brilliant minds that could have made our lives more efficient and productive would have been suddenly ripped from existence before they could implement their products?
Imagine your world today before the smart phone or software
that could increase your productivity and income or you were still behind a
carriage on the way to work? Thanos may
have made for an interesting villain and a great movie; but his solution of
eliminating population also eliminates productivity and innovation – and this
writer hopes the foolish and simple-minded snap is undone this weekend by a
series of heroes that have earned a lot of respect over the years by some great
minds leading the way like Kevin Fiege.
Oh no, what if Fiege was not head of Marvel Studios because he turned to dust? Perhaps there would be no need for this article then!
John D. Rockefeller – one of the wealthiest men who ever lived –
once said that the only thing that gave him pleasure was to see his dividends
That’s a strong statement. But if Rockefeller meant it, he must
have truly been the happiest man in the world. Rockefeller was the founder and
majority of Standard Oil, which was the predecessor of both ExxonMobil and
Chevron. And he insisted that 2/3 of the annual profits of the largest energy
monopoly in history be paid out in dividends. That’s a lot of income rolling in
For most investors, a dividend is simply a check that arrives in
the mail every quarter (or more likely gets posted to their brokerage account).
And to be sure, this is a nice perk. Getting a regular stream of income allows
you to realize regular profits along the way without having to sell your stock.
You can think of it as enjoying the milk from a cow without having to slaughter
it for meat. Sure, steak might be tasty. But once it’s gone, it’s gone, whereas
the milk can last a lifetime.
But dividends are about more than just income. They’re about being
a better kind of company. Earnings can be manipulated. Even sales can be
manipulated. But dividends have to be paid in actual cash. There’s no amount of
dodgy accounting that can fake cold, hard cash.
Furthermore, knowing that cash has to be on hand to pay dividends
forces management to be more disciplined. They are less likely to burn
shareholder money on expensive vanity projects when they know they might need
that cash to fund the dividend next quarter. They’re also less likely to dilute
their shareholders with stock-based employee compensation or secondary stock
offerings, as they’d have to pay dividends on any new shares created.
Some might argue that initiating a dividend is an admission by
management that the company’s best growth days are behind it. But as Sonia
Joao, President of Houston-based RIA Robertson Wealth Management explains,
“Paying a dividend doesn’t suggest slower growth ahead. If anything, it’s the
exact opposite. Precisely because the company expects durable growth, they’re
more willing to part with their cash.”
This isn’t just academic. Dividend-paying stocks have been proven
to outperform their non-paying peers over time. Research Ned Davis Research showed
that the equally weighted S&P 500 index enjoyed a compound annual growth
rate of 7.70% over the 1972 to 2017 period. But breaking the index down gave
very different results. The dividend payers collectively enjoyed returns of 9.25%
per year, while the non-payers lagged with returns of just 2.61%.
Even better, stocks that initiated or grew their dividends fared
best of all, enjoying compound annual returns of 10.07% per year.
So, not only do dividend stocks put a little change in your pocket
every quarter. They also massively improve the performance of your portfolio.
Today, we’re going to take a look at 20 stocks that have initiated a dividend in recent years. As these are all new dividend payers, not all are exceptionally high yielders. But all have made a commitment to start rewarding their patient shareholders with a regular cash payout.
The difference in life between success and failure, more than anything else, is having a plan and sticking to it.
you’re talking about launching a business, getting through Navy SEAL
training, becoming a concert violinist, or even getting a date on Friday
night; success comes from seeing a plan through to completion.
This is particularly true when it comes to investing.
Warren Buffett, the legendary Oracle of Omaha and by most accounts the most successful investor in history, is probably a
little smarter than you or me. I say “probably” because Mr. Buffett has
never published his IQ score, and measurements of intelligence can be
But, in Buffett’s own words, in order to be a great
investor, “You don’t need to be a rocket scientist. Investing is not a
game where the guy with the 160 IQ beats the guy with a 130 IQ.”
put that in perspective, the average IQ falls in a range of about 85 to
115. An IQ over 140 is considered genius level, and theoretical
physicists Albert Einstein and Stephen Hawking were believed to have
respective IQs of about 160 each.
So, according to Buffett, you
need to be a little above average to be a good investor. But you
certainly don’t need to be an Einstein or Hawking.
Buffett attributes his own success to “being greedy when others are fearful and being fearful when others are greedy.”
In other words, Buffett is Buffett not because of
his intelligence but rather due to his emotional control, which allows
him to stick to an investing plan even when most other investors are
pulling the ripcord.
Now, I don’t claim to have Warren Buffett’s
talents. But some of my greatest investment successes have come from
being equally stubborn about seeing a plan through to completion.
I don’t have a large enough nest egg to retire today. But it’s big enough that I don’t really need to keep adding to it with fresh savings. Even with very modest growth assumptions, the savings I’ve accumulated already should be more than sufficient to take care of me and my wife in retirement when that day comes in another 20 years. Savings I continue to add just put the icing on the cake.
It wasn’t fantastic investment returns that got me to this point. It was having a savings plan and having the discipline to see it through to completion. I max out my 401k contribution every year, even when doing so is painful. Even when the market looks scary. Even when I’d prefer to blow the cash on something else or when I have to tell my children that I can’t afford something they want right now.
I’ve enjoyed competitive returns on those funds over the years, but the high savings rate has had a much bigger impact on my ability to grow my capital base than my returns.
As another example, I bought 288 shares of Realty Income (O) in 2009 that I swore at the time I would never sell. I committed to reinvesting my dividends into new shares and letting it compound… for the rest of my life. My children may sell the shares when I’m dead and in the ground, but I never will. When I’m old and gray, I’ll simply turn off the dividend reinvestment and take them in cash instead.
after a little over nine full years of dividend compounding, those 288
shares bought for an initial purchase price of $6,620 are now 454 shares
Using conservative assumptions on dividend growth,
I would expect my investment to double every eight to ten years. So, in
another 20 years, when I’m getting close to retirement, I’ll have
something in the ballpark of $140,000 in Realty Income… still trucking
along and throwing off dividends. And all of that on an initial
investment of just $6,620.
Now, I’m not recommending you run out and buy Realty Income. I wouldn’t make a major new purchase at today’s prices. My point is simply that having a good plan – in this case buying and holding a high-yield dividend stock bought at crisis prices – works when you actually stick to it.
If you’ve read my work, you probably know that my grandfather was my
inspiration for getting into this business. He did well in the stock
market, and his enthusiasm for investing rubbed off on me.
grandfather lived by his own homespun version of Peter Lynch’s advice to
“buy what you know”; he had a strong preference for the shares of local
Well, as it happened, my grandfather lived in Fort
Smith, Arkansas, and there was a certain local company up the road in
Bentonville that was shaking up the retail market in the 1970s.
You might have heard of it… goes by the name of Walmart (WMT)!
grandfather never retired. Working was such an important part of his
identity that he continued to go to the office until the very end. But
the modest investment he made in Walmart shares ended up paying for my
grandmother’s retirement, my college education, my sister’s college
education, and my mother’s modest retirement today.
The funny thing is, that was never his plan.
He never expected
to hit a home run like that in the stock market. He owned a small
warehouse downtown, and he always imagined that, once he was gone, my
grandmother’s expenses would be taken care of with the rental income
from that property. (He owned that property free and clear of any
mortgage, I might add…)
Renting out the warehouse ended up being
more trouble than it was worth. My grandmother sold it, and she ended up
living on her Walmart dividends, bond interest, and Social Security.
start, capital gains are nice, but you can’t assume they’re going to be
there when you need them. That’s not something you can control.
a man who lived through the Great Depression, my grandfather knew that.
If you lived through the markets of the 1970s or 2000s, you might have
gotten a similar lesson. Between 1968 and 1982 and from 2000 to 2013,
the S&P 500 Index went nowhere.
If you’d been
counting on capital gains to meet your retirement expenses during those
stretches, you might’ve had to move in with your kids.
Second, diversification is critical – and “diversification” doesn’t mean owning five slightly different mutual funds. It means owning assets that don’t rise and fall together.
For my grandfather, this meant tying devoting significant capital to
his small businesses and keeping his liquid assets divided roughly
evenly among stocks, bonds, and cash.
For me, in today’s market,
“diversification” means keeping my assets divided among complementary
short-term trading strategies, longer-term income strategies, and
income-producing real estate.
For you, the mix might be different.
The key is making sure the pieces of your portfolio move independently
of one another. It does you no good to save for a lifetime if it all
gets flushed down the toilet in a major bear market.
make sure you’re getting paid in cold, hard cash. It seems so “old
timey” now, but my grandfather carried around a money clip with a big
wad of cash in it. I don’t remember ever seeing him use a credit card.
times have changed. The only people carrying around wads of cash today
are drug mules. But that doesn’t mean that cash isn’t king.
that generate regular cash payments allow you to realize gains without
having to sell anything. It’s like the old analogy of slaughtering a cow
for meat versus keeping it alive for milk. (Remember, my family’s roots
are in rural Arkansas…)
With the former, you eat well for a bit…
but then it’s gone. With the latter, you can enjoy fresh milk for a
lifetime… and you still reserve the right to slaughter the cow for meat
Dividend-paying stocks, REITs, MLPs, and other income investments are the same. You enjoy the milk every quarter… and you can still have your steak later if you ever decide to sell.
And, while you’re waiting, that cow just fattens up and produces more milk…
As we near the end of the first quarter, the competition is fierce in InvestorPlace’s Best Stocks for 2019 contest. Cannabis product maker Charlotte’s Web Holdings (CWBHF) is leading the pack, up 67% at time of writing, but onshore oil and gas producer Viper Energy Partners (VNOM) isn’t far behind at 29%.
Against this competition, LyondellBasell Industries(LYB) and its modest 4% would seem to be getting left in the dust.
But it’s still early, and we still have a lot of 2019 left to go. And
I’m expecting LyondellBasell to make it a competitive race, come what
may in the market.
LYB Stock Valuation
I’ll start with valuation.
A cheap price is no guarantee of investment success, at least over
short time horizons. But it certainly creates the conditions to make
outsized gains possible. LyondellBasell trades for 7.2 times trailing
earnings and just 0.83 times sales.
To put this in perspective, LyondellBasell’s P/E ratio was over 16 in
late 2012; by this metric LYB stock is trading at less than half its
valuation of seven years ago despite price/earnings multiples expanding
prodigiously across most of the stock market over that same period.
Likewise, LYB’s price/sales ratio has been bouncing around in a range
of 1 to 1.4 since 2013. Today’s 0.9 takes the stock’s valuation back to
early 2013 levels.
Again, a cheap stock price doesn’t guarantee a hefty stock return, at least not over any specific time horizon. But it certainly creates the conditions that make outsized returns possible.
Yes, I know. I’m being hopelessly stodgy. Dividends are almost inconsequential these days compared to the returns realized from rising stock prices. Since bottoming out in early 2009, the S&P 500 has exploded higher at a compound annual growth rate of over 15% per year and is up over 300% cumulatively.
What’s a couple percent in dividends when you’re looking at those kinds of capital gains?
Furthermore, very few sexy, high-growth tech companies pay dividends. Amazon, Facebook, and Alphabet (Google) certainly don’t, and none have immediate plans to start.
But it’s important to keep a few things in mind. To start, the 15% annualized returns we’ve seen over the past decade in the S&P 500 are by no means normal. The long-term term historical average is closer to 10%.
And mean reversion being what it is, having a long period of above average returns means we need to have a long stretch of lower-than-normal returns to get us back to the long-term average.
Not even the glassiest-eyed permabull seriously believes returns of 15% per year can continue forever.
Let’s slice the numbers a little differently.
The returns you achieve are ultimately a product of the price you pay. When you buy them cheaply, you put yourself in position to enjoy higher-than-average returns. When you overpay, you set yourself up to be disappointed.
Well, the S&P 500 currently trades at a cyclically adjusted price/earnings ratio of 29.9. That implies it is priced to deliver losses of about 2% per year over the next eight years, assuming the market returns to its long-term average valuation.
Now, maybe we get lucky and valuations remain at historically elevated levels. Hey, stranger things have happened, and there might have even been legitimate justification for it in lower interest rates and stricter accounting standards.
But even assuming valuations remain 25% to 50% higher than their long-term averages, we’d still be looking at returns in the ballpark of just 1% to 3% per year.
When you’re used to making 15% per year, making 3% (or even losing money) is a bitter pill, particularly if you’re already in retirement and have to take portfolio drawdowns.
This brings me back to dividends.
With and Without Dividends
Sometimes a picture is worth a thousand words. So, take a look at the following two charts. The first is a standard price chart of telecommunications giant Verizon (VZ).
It’s not pretty. Nearly 20 years since the peak of the 1990s
internet bubble, Verizon has yet to see new highs. Had you had the remarkably
bad timing of buying Verizon at its 1999 high, you’d still be under water two
Now take a look at the second chart. This is also Verizon, but this chart adjusts stock prices to account for dividends paid. For most of the past 20 years, Verizon has sported a dividend yield of between 4% and 6%.
Suddenly, Verizon doesn’t look so bad. Even buying one of the
most overpriced major stocks at the peak of the biggest stock bubble in
history, you still would have enjoyed total returns of more than 140% after
accounting for Verizon’s massive dividend yield.
Now, my point is not to recommend Verizon. At current prices, it’s not cheap enough for me to seriously consider.
But its performance proves a very important point about the
importance of dividends, particularly at a time when stocks are expensive and
priced to deliver disappointing capital gains.
You can’t always depend on capital gains. You can do everything
right – research your stocks, buy them at reasonable prices, etc. – but you
can’t make them go
up in value.
Ultimately, the market is going to do what it’s going to do, and
it doesn’t care what return you need or expect.
When you focus on dividends, you don’t have to worry as much about capital gains. Sure, you want to see your account rise over time. But you don’t need it to.