Tuesday, December 15, 2015

Despite Upcoming Fed Action to Boost Rates Slightly, Interest Rates Will Stay Low for Years to Come ... For a Growing Stream of Investment Income, Look to Blue Chip Dividend Paying Stocks

Stock prices rise and fall regularly and sometimes violently over the short term. But over the long haul, they consistently rise.

As a result, developing a long term regular savings habit while young and investing in blue chip dividend paying stocks is the smartest way for individual savers and investors to assure their family's financial security over time. But while the inevitable long term direction of the stock market is to go higher, that's going to be accompanied by many rough rides in the volatile up and down shorter term, such as we've been experiencing recently.

And since, unlike house prices and other assets, stock prices are broadcast minute by minute during the trading day, people too often, and I would argue foolishly, choose to focus on the daily trading volatility and ignore the long term income gains which will accrue over time to long term owners of stocks. We'll focus on just the cash income piece of dividends on stocks versus interest bearing investments today and set aside for later the even more important accompanying long term share price appreciation story.

A stock with a dividend yield today of ~3% will become a ~6% yielder on cost in ten years, assuming a 7% annual dividend increase. And it will then grow further to become  a ~24% yielder 30 years from now. For the sake of comparison, today 10 year government bonds have a fixed payment until maturity yield of ~2% and 30 year governments will yield less than 3% each year for the thirty year period. For a timely example of stocks and dividends, see Boeing Boosts Buyback Program, Increases Dividend.

Today the interest on high quality bonds is generally less than the current cash dividend paid on blue chip dividend growing stocks. That is likely to remain the case for years to come, thus changing the future investing case for stocks over bonds dramatically  by making dividend payers preferential to owning bonds. See Why Very Low Interest Rates May Stick Around.

And by strictly focusing on income, we're not even considering the future appreciation of the share prices which, unlike the unchanged price of the principal on bonds from issuance until maturity, will likely increase several fold over time, thereby outpacing inflation and preserving the purchasing power of today's money.

Are Blue Chip Stocks the Answer to the Income Investor's Dilemma? lays out the case in plain and simple language:

"It has been a terrible week for yield-hungry investors. . . .

Junk bonds have been shellacked as fund withdrawals accelerated and a high risk mutual fund imploded. Utilities and real estate investment trusts have slumped as investors prepared for a Federal Reserve rate hike.

The antidote to all this carnage, suggests John Petrides, portfolio manager at Point View Wealth Management, is buying blue chip dividend stocks. . . .
Investors need to balance their portfolio and have a portion focused on total return, not entirely seeking to maximize income. There are plenty of high quality blue chip stocks with a yield above 3% that can fit this bill. More importantly, what the baby boomers need to focus on is growing income, not just current yield. Stick with companies that have a history of raising their dividends.
His suggestions:
  • Walmart (WMT): attractive at 3.3% yield
  • Johnson & Johnson (JNJ): has a 2.9% yield and has grown the dividend 10% annually for the past 10 years
  • AT&T (T): just completed the Direct TV merger and offers 5.5% yield
While these stocks may also be volatile along with market conditions, he thinks the dividends are secure and may grow for some of them. Petrides writes:
In theory, if you are an income investor, you should view your portfolio like a rental property. As long as the cash flow comes in and the tenant pays the monthly check, you should not care about the short term movements in the values of homes in the surrounding area. In income investing, as long as the companies do not cut, suspend, or eliminate the dividend, less attention should be focused on the day-to-day movement on the investments. In practice this can be hard to follow in a volatile market."
Summing Up

GE, Pfizer, Merck, McDonald's, Microsoft, Intel, JP Morgan, Boeing and Exxon are several other blue chip companies that pay good dividends and have a solid track record of increasing both their cash dividends and share prices over time.

For what it's worth, an all equity portfolio of blue chip dividend payers and growers is how I invest and have for a long time. Tuning out the short term noise and instead focusing on the long term objective definitely helps the cause.

In my view, fixed income investing doesn't pay enough and isn't safe enough in an interest rate rising environment. And that's exactly the stage we're entering, and one which will last for perhaps the next ten to twenty years.

That's my take and I've planned and positioned myself accordingly. My younger and middle age friends out there should consider doing so as well.

Thanks. Bob.

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