So much news to digest and so little time. We just hold the arms of our chairs in a death grip and wait for the next blast of economic input to smack us upside the head. On the brighter side, the folks at Institute of Trend Research (ITR) have just issued their April report that indicates continuing economic gains through mid-2018 and then a slacking off as the year progresses — with a possible mild recession in 2019. Stock market performance often starts reflecting what the economy is expected to do about a year before those economic events take place.
Meanwhile, a new component in ITR’s forward indicator is the increasing number of Google searches for “recession.” The number of people conducting that search has proven to be a better indication of what investors might be planning to do with their future investment allocation. There are, after all, a large number of investors who think they can time the market and who move between equities and cash at the drop of a hat. An increasing number of those thinking about recessions can create a self-fulfilling prophesy if they start acting on their instincts. It’s only the thin slivers of stock traded on Wall Street which affect the value of all outstanding shares from moment to moment. It doesn’t take many nattering nabobs of negativism to drive down the price of those traded shares — which affects all shares in the moment — including those we expect to own to perpetuity.
This requirement brings up the class of equities representing our last refuge for the long-term hold — a share class for those who want to remain committed to the markets and who can steel themselves to whatever the future may bring. “Dividend achievers” are public companies that have paid steadily increasing dividends each year for the past 10 years. “Dividend aristocrats” are said to be companies that have paid steadily increasing dividends for the past 25 years.
That’s not to say that the dividends paid by these companies represent the highest percentage yield compared with, say, the “Dogs of the Dow” which are the 10 Dow Jones stocks that pay the highest percentage yield. Or, say, a mutual fund that calls itself something like “high dividend yield index. Achievers and Aristocrats are simply trying to deliver consistently increasing dividends. Their managers operate their companies conservatively and profitably year after year. What follows, historically, have been capital gains leading to a satisfying total annual return when combining both dividends and gains — a package that holds up well in market downdrafts.
A Google search of achievers and aristocrats will bring you to mutual funds and Exchange-Traded Funds (ETF’s.) An ETF invests in what it categorizes as an index of companies meeting the 10 or 25 year dividend-paying criteria. For those unclear about what an ETF is when compared with a mutual fund, consider the following simple explanation:
A mutual fund is valued at the end of each day based on the closing share price and volume of each of the fund’s investments. An ETF is best-described as a public company that happens to own a basket of stocks that fit the purpose proclaimed by the fund. The value of the ETF’s stock which can be traded from minute to minute throughout the day is based on what the trading public wants to pay for that basket of stocks. The price may vary from what the sum of the stock’s values would dictate had it been priced like a mutual fund at the end of the day. It’s somewhat Berkshire Hathaway, which also owns shares of public companies like Coca-Cola and Burlington Northern Railroad, but those share values are not directly connected to the value of what investors think Berkshire is worth from moment to moment. And there is never an end-of-the-day effort to value all of Berkshire’s holdings and use them to establish Berkshire’s stock price at the close of market. In a way, Berkshire was an “ETF look-alike” before ETFs were cool.
Meanwhile, for those feeling a little queasy but who want to remain committed to equities, moving toward fields of growing dividends might generate fruitful harvest by the time this fall rolls around.