Friday, January 10, 2014

How to buy when there is blood on the streets

As dividend investors, we know that we need to purchase quality companies that sell at attractive valuations. We know that the companies to buy and hold are those that can deliver earnings and dividend growth for years to come. These dividends would meet our future expenses, and rise over time to compensate for the eroding value of the dollar. The one thing that many investors fail to take into account however, is that there are many times in the lives of a company, where it stumbles on its strategy execution. As a result, even a reliable dividend growth payer might face some uncertainty, that could make even its most loyal long-term investors lose sleep at night. These situations are usually the types of events that separate the winners from the losers in the game of long-term dividend investing.

Rather than lose sleep, the objective dividend investor should evaluate the underlying fundamentals with a cool head, and determine what to do. If the dividend cannot be increased over time, that would mean that the stock is a hold at best. However, if the dividend cannot and is not supported, this would most likely be a sell signal for a dividend growth investor. However, if there is still room for growth in earnings, that could trickle down into some dividend growth over time, then the stock is likely a buy at attractive valuations.

In previous articles I have discussed how lower entry prices usually result in higher dividend and capital returns over time for investors. That’s because purchasing a share of a dividend growth company at $40 will result in slightly faster compounding, than purchasing the same stock at $50. Unfortunately, few investors capitalize on opportunities when they are available at attractive prices. This is because in many situations, these opportunities look like the end of the dividend growth streak. For example, McDonald’s (MCD) didn't look so sexy between 2001 and 2003. The company had expanded too quickly, Americans were not very happy with the menu and the slow and rude service. Dividend growth slowed down as well, and the share price tumbled precipitously. Luckily, the company initiated a turnaround effort, remodeled stores and introduced new items, which led to pretty dramatic increase in earnings, dividends and share values. The message is to give the company you own the benefit of the doubt, and hold on for as long as possible, until you are proven wrong by the facts.

Johnson & Johnson (JNJ) was another company which faced recalls at the beginning of the decade, which spooked many dividend investors. However, the company maintained confidence in its long-term prospects, as evidenced by the increase in annual dividends. Investors who stuck with the company did have a few tumultuous years, but finally earnings per share are estimated to surpass the highs in 2010.

Right now, Target Corporation (TGT) seems to be the company that has a lot of negative publicity. The company has been unable to gain momentum in its expansion efforts in Canada. In addition, its point of sale (POS) terminals at stores have been breached, thus compromising the credit and debit cards of 40 million customers.

I see this stumble as a temporary opportunity to acquire shares of this retail giant at attractive valuations. Even if growth slows down, the company still has some room for growth in the US organically. In addition, its stores are much cleaner than rival Wal-Mart (WMT), plus it has a very loyal base of customers who love the shopping experience.

As the company is stumbling however, it is getting increasingly difficult to hold the stock. I am sure that there are thousands of investors out there who are second guessing their decision to put their money in Target. It is very difficult to have bought a stock, and then to have negative headlines about it. However, as your dividend checks clear in your brokerage account, you get some sort of a positive reinforcement that business is still getting done at Target, and the company is still earning billions of dollars every year. I do not have a crystal ball, but based on my evaluation of the situation, I plan on adding more to the stock in the coming months.

I recently added some shares of Target (TGT) commission-free using my Loyal3 account. If the shares go lower from here, I would likely add again. Unfortunately, I would only have approximately two-three opportunities to add the stock in the coming 2014. I would try to spread them out across the year accordingly. If the shares rise above $69 however, I would likely abstain from making any further purchases.

Over the past month, I have driven by several Target locations in my area, and have noticed that parking lots look full most of the time. As a result, I am fairly confident that any weakness in sales and traffic trends might be temporary, if not largely overblown.

I think the best way to take advantage of temporary weakness in stock prices is through the meticulous process of dollar cost averaging your way into attractively priced stocks every single month. A dividend investor who puts money to work every month won't buy at the bottom, but would have the discipline to put money to work, when everyone else is scared. This puts the odds of success heavily into his or her favor.

Full Disclosure: Long TGT, MCD, JNJ, WMT

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9 comments:

  1. I agree with the overall premise (good stuff as usual).

    However I don't think Target is anywhere near a "blood in the streets". That is really a once in a generation type of event - Target was already a few points higher than it was a year ago. This was more like a simple earnings miss which causes short term investors to run for the door.

    The streets looking pretty clean to me these days, be patient and some opportunities will surely come. Having said that, purchasing TGT at these levels is a very sound buy.

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  2. If, in hind sight, it would have been better to sell prior to some pundits prediction of a 40% crash and sit in cash waiting to plunder cheaper stocks, why not sell the stocks now that you are less than 40% up on?

    There are several pundits predicting this crash will occur within a year. What say you?

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  3. Greetings DGI. I have no problem buying when there is blood in the streets.....my concern is the lack of blood over the last 3 years. Time will tell, but it seems logical for profit margins to revert and equity prices to go down. I'm with you in that dividend paying stocks offer more protection than the typical market. Thank you for your post

    -Bryan

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  4. Target down again today. Assume you're buying. Frankly, after reading your posts over the past couple of months, I believe your investment philosophy is way off the mark. One should never chase yields purely for the sake of the yield itself. Growth of the initial investment should outweigh the yield. No point -- as you have suggested -- in not caring if the investment sinks, as long as the dividends continue to roll in.

    One canot restrict oneself to a singular investment philosophy. Far better to be diversified in thought and in action.

    If you backtest a company that over the past 10 years had a low yield but tremendous growth in its stock price (e.g.: Dorman Products) your basic investment wealth would be many thousand dollars ahead of, say, Johnson & Johnson (JNJ) whose stock has been sluggish by comparison, but whose dividend has increased.

    By focusing on the dividend/yield you're putting your money on the slowest pony in the race.

    I am open to discussion on this topic, but I do feel, sorry to say, that you are blinded by your investment belief.

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  5. Anthony: If you read DGI's articles going back a few years, you'll realize that he takes into account much more than the dividend yield - both for buying and for selling. As well, he buys companies that have low yields but high growth rates.

    You are correct that the dividend yield alone is not enough for a good system.

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  6. Thanks for writing this blog. I stumbled across it a couple of weeks ago and have enjoyed reading the current and some of the past posts. I myself have been honing my investment philosophy which is not much different than yours. This is why I have enjoyed some of your articles.

    I have found it encouraging that you have set an investment philosophy and stuck with it. I believe that switching philosophies is what causes most individual investors to lose their money over the long haul. While your dividend philosophy will have its ups and downs, sticking with the idea you have set should be successful over the long haul.

    As for finding value in the market, I am having a tough time finding stocks that meet my thresholds but I am always looking for the “blood in the Street(s)” with the stocks I am interested in. I do believe your TGT example is a good choice right now. I too find TGT to be a good investment choice but I would like to see the price a little lower. But if enough water cooler talk gets short term buyers to leave this stock, I will be in the buying mode.

    Thanks again and I look forward to the next article.

    ReplyDelete
  7. Hi Anthony,

    You have the right to your own opinion, whether it is right or wrong. That is because you are the one to live with the consequences of your decisions.

    If you find something that works for you that's great. Stick to it, and don't let anyone else tell you otherwise.

    Dividend investing works for me, and I know it is the system that will help me achieve financial independence. I am fine if others disagree with me. I am not going to debate anything with you, because I have been talking about dividend stocks for 6 years on this site.

    But next you propose another strategy or security that is superior to dividend growth investing, I would appreciate if you tell me about companies like DORM in advance. Otherwise, your example seems cherry picked, but doesn't really prove anything. If you purchased the company and profited, I am happy for you.

    I would encourage you to read the archives of the site, as I have a lot of information on income investing.

    Good Luck!

    DGI

    ReplyDelete
  8. Kurt,

    Thanks for comment. Instead od making 2 - 3 larger purchases of TGT, I am going to make 6 - 9 smaller ones using Loyal3 in 2014.

    Hopefully they go lower from here.

    Fast Weekly,

    I agree there has been only exuberance. One acquantance of mine, who has always been negative of stocks bought stock mutual funds a few days/weeks ago *( he recently told me this week). So maybe stock prices will fall from here?

    Jedsbud,

    Welcome to the site and thanks for reading. I am writing this site in order to try to keep myself accountable and stick to my process, plus do all the work I need to do in order to achieve my goals.

    Thanks everyone for stopping by and commenting!

    DGI

    ReplyDelete
  9. Hi Richard,

    I stick to my process of putting money to work every month in quality companies selling at attractive/fair valuations. As long as I can find those for my diversified portfolio, I would stick to my plan.

    I usually completely ignore the opinions of other "pundits". Their guess is as good as anyone's. They get media attention, but their results have been DISASTROUS, since some of them have been bearish for DECADES. The Media (TV, newspapers) loves them, because it brings more readers and more advertising revenues for them.

    Unfortunately hindsight is always 20/20. Ever since the bottom in 2009, someone has always forecasted the top and stock price crashes.

    I invest for the next 30 years, which means that I would experience several declines in excess of 20 - 30% over those decades.

    DGI

    ReplyDelete

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