Every month, The Prudent Speculator produces a newsletter that includes a market summary, helpful charts and graphs, recent equity market news, economic outlook and specific stock investment strategies focused on value stock investing. This month, we offer a brand new recommendation with a big dividend yield in the Industrials sector while our Graphic Detail revisits the Value of Dividends as the Federal Reserve has initiated what is expected to be a series of interest rate cuts. Note that the entire list is available to our community of subscribers only.
Editor’s Note: Interest Rates, Value of Dividends and the Federal Reserve
“Rates are Falling, So Let’s Turn to Other Worries,” proclaimed a prominent headline in The New York Times in a recent Sunday edition. The article by a long-time business columnist went on to say, “Even though the Federal Reserve has cut interest rates, we’re not yet out of the woods.”
To be sure, there is nothing wrong with offering caveats and we constantly remind our followers that volatility is part of the equity investment process, with 5% setbacks taking place three times per year on average and 10% corrections happening every 11 months, but the article ran just as the major market averages hit all-time highs, with handsome double-digit percentage gains on the year, reinforcing our long-held belief that the secret to success in stocks is not to get scared out of them.
That is easier said than done, especially in today’s sensationalistic 24-7 media world. Bill Gates stated, “Headlines, in a way, are what mislead you because bad news is a headline, and gradual improvement is not,” but far too many stories focus on the negative at the expense of the positive. In fact, the headline for the online version of the same piece was a bit less disconcerting, “Now That Rates Are Falling, Let’s Turn to Other Matters.” It is said that 80% of readers never make it past the headline, so we suppose the print edition editors thought they needed to be more evocative to attract interest, even as we suspect that few perusers of the Times that Sunday made it to paragraph 11 in which the columnist revealed, “Despite all this, however, I’m bullish on the stock market.”
What was all this? The author wrote: Start wherever you like. Personally, I begin with broad political and geopolitical concerns, not specifically financial ones, leading with the presidential election in the United States, which is still too close to call. Then, when I can stand it, I survey tensions around the globe, from the hostilities in the Middle East to Russia’s war in Ukraine to incipient conflicts involving China in the Taiwan Strait and the South China Sea.
There’s no shortage of explicit economic and financial issues percolating within U.S. borders, either. The Fed depicted its decision to reduce the benchmark federal funds rate by half a percentage point as a prophylactic measure, aimed at heading off an unemployment spiral. The economy looks fairly strong now, but unemployment has already begun to rise and in many past cycles, slowing job growth has culminated in mass layoffs. The potential for a widening economic slowdown that becomes a full-blown recession will be with us for some time.
To that litany of concerns, we could add the devastation inflicted by Hurricane Helene, the escalation of hostilities between Israel, Hezbollah and Iran, and longshoremen striking at ports in the East and Gulf Coast.
Of course, your Editor is still waiting for the day when we are “out of the woods,” and we are reminded that George Bernard Shaw defined a newspaper as a device unable to distinguish between a bicycle accident and the collapse of civilization! Indeed, there always has been something to worry about since the launch of The Prudent Speculator in March 1977, yet equities have generated average annualized returns of 12.5% (Dividend Payers) to 14.0% (Value) over the last 47+ years.
We are not suggesting that today’s fears are unfounded, but stock prices have not-so-steadily moved higher in the fullness of time despite a constant stream of unnerving headlines. There always will be downturns along the way but corporations generally become more valuable over time because their sales and earnings grow, while short-term dislocations often afford opportunity to buy long-term value at attractive prices. We will always pay attention to the news, but we agree with Warren Buffett who said, “Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.”
“I am an old man and have known a great many troubles, but most of them never happened.” — Mark Twain
Graphic Detail: The Value of Dividends Revisited
We are always focused on capital appreciation first and foremost in our value stock selection, but we have long been fans of dividend-paying companies, especially as income producers historically have delivered better returns than non-dividend payers over the long-term and more than a third of the total return on equities over the last century has come from dividends and their reinvestment. Adding to the appeal of dividend payers is that they have had lower standard deviation (volatility), offering lower risk to go along with higher returns.
True, dividend yields today are much lower than in the past and folks seeking income have piled into other financial instruments, such as money market funds where assets recently topped $6 trillion for the first time this year. However, with the Federal Reserve last month easing monetary policy by initiating what most are expecting to be a series of interest rate cuts, yields on “safe” investments like the Schwab Government Money Market Fund have fallen, dropping from 5.0% a few weeks back to 4.6% as of this writing, while the S&P Dividend ETF (SDY) has outperformed the S&P 500 ETF (SPY).
Return of principal is far more important than return on principal for many investors, but it shouldn’t be a surprise that there has been greater market appreciation for dividend-paying stocks in the past when interest rates were falling and the Fed was more accommodative.
Recommended Stock List
In this space, we list all of the stocks we own across our multi-cap-value managed account strategies and in our four newsletter portfolios. See the last page for pertinent information on our flagship TPS strategy, which has been in existence since the launch of The Prudent Speculator in March 1977.
Readers are likely aware that TPS has long been monitored by The Hulbert Financial Digest (“Hulbert”). As industry watchdog Mark Hulbert states, “Hulbert was founded in 1980 with the goal of tracking investment advisory newsletters. Ever since it has been the premiere source of objective and independent performance ratings for the industry.” For info on the newsletters tracked by Hulbert, visit: http://hulbertratings.com/since-inception/.
Keeping in mind that all stocks are rated as “Buys” until such time as we issue an official Sales Alert, we believe that all of the companies in the tables on these pages trade for significant discounts to our determination of long-term fair value and/or offer favorable risk/reward profiles. Note that, while we always seek substantial capital gains, we require lower appreciation potential for stocks that we deem to have more stable earnings streams, more diversified businesses and stronger balance sheets. The natural corollary is that riskier companies must offer far greater upside to warrant a recommendation. Further, as total return is how performance is ultimately judged, we explicitly factor dividend payments into our analytical work.
While we always like to state that we like all of our children equally, meaning that we would be fine in purchasing any of the 100+ stocks, we remind subscribers that we very much advocate broad portfolio diversification with TPS Portfolio holding more than eighty of these companies. Of course, we respect that some folks may prefer a more concentrated portfolio, however our minimum comfort level in terms of number of overall holdings in a broadly diversified portfolio is at least thirty!
TPS rankings and performance are derived from hypothetical transactions “entered” by Hulbert based on recommendations provided within TPS, and according to Hulbert’s own procedures, irrespective of specific prices shown within TPS, where applicable. Such performance does not reflect the actual experience of any TPS subscriber. Hulbert applies a hypothetical commission to all “transactions” based on an average rate that is charged by the largest discount brokers in the U.S., and which rate is solely determined by Hulbert. Hulbert’s performance calculations do not incorporate the effects of taxes, fees, or other expenses. TPS pays an annual fee to be monitored and ranked by Hulbert. With respect to “since inception” performance, Hulbert has compared TPS to 19 other newsletters across 62 strategies (as of the date of this publication). Past performance is not an indication of future results. For additional information about Hulbert’s methodology, visit: http://hulbertratings.com/methodology/.
Portfolio Builder
Each month in this column, we highlight 10 stocks with which readers might populate their portfolios: Broadcom (AVGO), EOG Resources (EOG) and United Parcel Service (UPS).
Kovitz Investment Group Partners, LLC (“Kovitz”) is an investment adviser registered with the Securities and Exchange Commission. This report should only be considered as a tool in any investment decision and should not be used by itself to make investment decisions. Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.