Saturday, January 17, 2015

Individual Investors Should Stay With Blue Chip Dividend Paying Stocks for the Long Haul .... In Addition to Long Term Share Price Appreciation, It's a "Current Income Thing" as Today's Cash Dividends on High Quality Stocks are Higher than Interest Income on High Quality Bonds

2015 has been a rough ride for individual stock investors thus far. After another volatile ride this past week, stocks rallied Friday but still finished lower for the week. See U.S. Stocks Rise Sharply.

So now what should individual investors do? My view is that long term individual investors should relax and enjoy the ride to financial security, as uncomfortable as it may be from time to time.

And for those of you who aren't finding the current ride to be any fun at all, then don't watch. Simply close your eyes and try to think of something else that's more pleasant. But keep riding and in due course, you'll learn to relax during the bumpy times as well. It's an experience thing.

How to Play Stocks Now contains some timely and great fact based advice for individual investors:

"One day, the six-year bull market in stocks will end. This past week’s sharp price swings suggest many investors fear that time is now, and unexpected turmoil in the currency markets is rattling nerves further. . . .
For all the compelling arguments that stocks are poised for a fall in 2015, there is a case to be made that stocks will resume their rise. It hinges on these four basic reasons:

Investors Get Paid

The S&P 500 has almost tripled since March 2009, and many investors worry the gains have run their course.

Yet dividends paid out by companies in the S&P 500 have been rising at the same time .... The S&P 500 rose 65% from December 2010 through December 2014 . . . . In that same period, dividends per share went up 74% . . . . Investors have been rewarded not just through the rise in the value of their stocks but also through dividend payouts. . . . low interest rates make bonds a dismal alternative . . . .

The Fed Is Patient

Investors have been worrying for a long time about what might happen when the Federal Reserve starts to raise short-term interest rates, as the central bank’s extraordinary efforts to stimulate the economy since the financial crisis are widely believed to have given share prices a major boost.

Many economists expect the moment of truth to arrive midyear. If the Fed moves sooner than expected, or increases rates to a greater extent than expected, though, the stock market could get a jolt. . . .

So it is worth noting that recent comments coming out of the Fed have indicated that the central bankers are trying to avoid any sudden movements that might spook investors. . . .

Recession Risk Is Low

The last six times the S&P 500 produced negative annual returns, including dividends, the U.S. economy was in or near a recession. The most recent example was 2008; the others were 2002, 2001, 2000, 1990 and 1981.

“If you want to know what hurts earnings and takes down markets, it’s a recession,” says Tobias Levkovich, chief U.S. equity strategist at Citigroup .

That is important because economic data don’t seem to be signaling an imminent recession. Low gasoline prices, strong auto sales and the potential for more housing construction should keep the economy afloat....

Sharmin Mossavar-Rahmani, chief investment officer at Goldman Sachs Group ’s private wealth-management unit in New York, said a recession likely won’t occur until the economy is growing so fast for so long that the Fed raises interest rates high enough that they start choking off growth.

“That’s in the distant future,” she says.

Investors Could Calm Down

In October, the S&P 500 fell 5.4% in a week. Investors then were worried that falling oil prices were a sign of economic weakness. They also were nervous about what the Fed would do. Europe, Japan and China seemed to be struggling, to boot. Stocks eventually recovered.

There was a similar drop in mid-December, and again stocks bounced back to records.

None of that is a guarantee that the current turmoil also will be short-lived. But it does indicate there are a lot of investors primed to sell at the first sign of trouble. . . .

At the same time, what matters to many investors isn’t just the news, but the news relative to expectations. If the situation turns out not to be as bad as they think it might be—which has happened more than once since the financial crisis—nervous investors may calm down. . . .

Investors should weigh all four of the above reasons to be optimistic about stocks.

If . . . you are the type of investor who doesn’t handle uncertainty well, you should contemplate lowering your anxiety by trimming the amount of stocks you own. . . .

Now also could be a smart time to shift money into stocks that pay healthy dividends, which offer investors compensation for the risk that there could be a significant downturn in the market. . . .

In that sense, investing is a bit like flying a jumbo jet. The typical flight is an unexciting affair and everything works just fine on autopilot. But there are also moments of extreme danger when lives depend on whether the pilot stays calm.

Don’t double down on stocks because there are bullish arguments to be made, and don’t let the fretting of others force you to stash your savings under your mattress.

Instead, stay invested in stocks to the extent you are comfortable, and no further, so that you can react rationally when the moment of chaos arrives."

Summing Up

Individual investors should look past current market noise and instead focus on the long term.

Blue chip dividend paying stocks are solid investments over time, and today they are paying cash dividends greater than income received from government bonds.

Here's the 1-2-3 deal --- (1) For current income, blue chip dividend stocks are the place to be. (2) For income growth in the form of increased cash payments over time, blue chip dividend stocks are the place to be. (3) And for inflation beating asset price appreciation over time, combined with dividends received, blue chip dividend stocks are the absolute best place to be.

So we long term oriented individual investors should sit back, take a deep breath, relax and allow the operating heads of the blue chip companies that we 'own' do the heavy lifting. The long term rewards of share ownership will be worth our time and invested money. 

That's  my take.

Thanks. Bob.

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