What happens after you get exactly what you wish for? If you are a rather conservative, dividend driven total return investor, the recent equity market environment in high capitalization big company stocks that pay good dividends has been, for the most part, as good as it gets. In the last two years at Kensington A.M.I., we’ve invested client assets in companies such as John Deere, Western Digital, Apple, Cummins, Clorox and many others. These stocks have not only paid very good dividends since purchase, but some have shot up like a moon rocket (Apollo launch Pictured above) in value as much as 100% or more; delivering big total returns far above expectations.
So when you get exactly what you want, what then? What do you invest in after many of the stocks that comprise your portfolio model have shot into the stratosphere and are no longer buyable? This is what you call “a high class problem”.
Blue chip stocks are the most expensive they’ve been since at least 2007. The price-earnings ratio of the S&P 500 is at a lofty 18X as of mid May 2017, well above their historical average of 15.2. Even though corporate earnings are now growing at a good pace for the first time in more than two years, stock prices have jumped way out ahead of earnings and even further out ahead of top line revenues.
So what if you wanted to start a blue chip portfolio at this point? Is it too late?
Many advisors would say “wait for a pullback”; a price decline of several percent or more where new money can be invested at somewhat cheaper prices. (I find myself saying this too). The problem with “pullbacks’ of more than just 2% or 3% is they are usually precipitated by some really scary news headlines that can quickly change investor sentiment from that of eager buyers to frightened sellers, where true buying opportunities quickly come and go as skittish investors watch prices shoot back up as soon as the frantic headlines calm down. Buying at just the right time is really hard to do.
There is a way to start a dividend driven total return portfolio even now. The full methodology we use for dividends and total return is proprietary, but some aspects can be related here.
First, just start with a “down payment” on your portfolio. Invest only a minority portion of your starting money, maybe 30% of your available total. If markets keep going up, at least you are partly invested. If markets go down, you can then fill out your holdings at lower prices.
Second, there are still some good quality dividend payers that are less expensive than many of the top performers. Some of the major telecoms, electric utilities and some other groups have been left behind in the 2016-2017 rally still offer some pretty good value. The best quality names among these industry groups may be a good starting point.
Third, make up a buy list of high quality stocks that pay good dividends but have increased in value recently. In an inevitable market correction, you might be able to buy those as they return to less expensive levels.
The above is only a very basic framework of a much more sophisticated system we use for income and total return, but it’s a good place to start in an environment where shareholders are dealing with the high class problem of a market that has gained so much in the past few years.