Hot News Comes and Goes, But Dividends Are Forever . . .

Investors are constantly inundated with the latest regional conflict, political debate, economic data and interest rate predictions. All of this information represents the collective viewpoint or “consensus” of investors at any given point in time.

Over the many years we have spent studying the markets, the truest thing we know is that the consensus is already priced into the market... and the consensus is almost always wrong. If an investor believes the economy and earnings will be better in the future, they will “vote” with their money. In aggregate, all of those votes create the price level for a particular stock. If the consensus comes true, you won’t see much of a change in the markets and prices will generally drift sideways.

What changes the price of stocks are the things that the consensus doesn’t already expect. Therefore, the only way to make excess risk-adjusted returns is either:

1) Find where the consensus is wrong.

2) Look outside the box.

How Dividend Payout Ratios Impact Valuation

   One of the greatest misconceptions among investors is that valuing the market at any given time is impossible. Many people seem to believe the stock market is nothing more than a betting parlour where today's price or tomorrow's price is whatever the fickled gods of Wall Street decree it to be.

Part of this misconception comes from the many voices in the media that are at the extremes in their predictions of where the market is going. On one side, the “stock market bubble” pessimists (who have been saying the same things for the past 5 years) are predicting that the market is overvalued 25% or more. On the other hand, many in the bullish crowd are saying the market is as much as 25% undervalued.

Whom are investors to believe?

Consolidating, Validating and Recalibrating

A number of different worries have rattled the market to start 2014.  Let’s take a closer look at what they are and what each of them means for the global economy and markets.

1. Housing Slowdown

Housing represents a very large part of the U.S. economy (about 20%), which is why economists and investors alike pay close attention to housing data.

 

After a strong 2013, the housing market data has weakened.  New home construction surged in November 2013, but fell in December 2013 and January 2014.  Rising interest rates are likely to blame.  Mortgage rates have risen to 4.5% from their lows around 3.5% in early 2013.  The threat of rising interest rates in 2014 and 2015 has investors concerned that the weakness in housing may continue.

The lull we are seeing in the data could be a result of last year’s low rates, which likely pulled forward some purchases that may not have ordinarily occurred until six months to a full year later.  The abnormally cold winter may also be

ABCs of Dividend Investing: How to Navigate the Current Sell-off

Since the beginning of the year, stocks have fallen by about 5%.  The modest pullback has many investors wondering whether a full out “correction” (drop in prices by 10% or more) is on its way.  

When the inevitable fluctuations in stock prices come, investors are all left with the same question: What should I do with my portfolio?

At Donaldson Capital Management, we have a particular strategy for handling market upswings and downswings.

What Is An ABC Portfolio?

As many of you are familiar, we invest only in dividend-paying stocks but we break down our portfolios into three types of dividend-paying stocks.  For those of you who are not familiar, we structure our portfolio into A, B and C stocks.  

Below is a summary of each sub-portfolio and it’s specific characteristics.  You can read about each sub-portfolio in more detail here.

Our primary investment model (“Rising Dividend-Cornerstone”) is comprised of all three types of dividend stocks.  

Regardless of what type of market we are in, a portfolio of A, B and C dividend stocks will have at least one group that performs better-than-expected.  This type of portfolio significantly outperforms

Dividends: A Guiding Compass in Choppy Stock Market Waters

At the close of the market on January 27th, the S&P 500 was down 3.1% from its record high on January 15th.  This modest pullback has caused nervousness amongst many investors.

Is this pullback something long-term investors should be concerned about?  We don't think so.  Here's why:

1. Stock Market Volatility is Normal

The market's unbroken march upward in 2013 caused many investors to forget what market turbulence looks like.

With so many forces at work in the stock market, it is difficult for one particular trend to last for a sustained period of time.  The market is positive 7 out of 10 years, but the standard deviation of 20% around the long-term average of 10% would make anything between 0% and 30% normal.  Rarely does the market advance higher without

The ABCs of Dividend Investing: Divi-do or Divi-don't?

Low interest rates have propelled dividend income investing to greater popularity in recent years than at any time in the past six decades.

Despite dividend-investing's recent popularity, many investors still only look at one facet of the power of dividend investing: dividend yield.  These investors point to the fact that dividends have represented 40% of the total return of stocks since 1960 and that many dividend stocks yield more than short-term Treasury bonds.  But that is where they stop, and in doing so, they miss an important quality of dividend investing: dividends are more than income, much more. 

The most important element of dividend investing is the statistically significant long-term relationship between dividend growth and price growth.  Understanding this relationship is the key to unlocking the true power of dividend investing.

Dow Jones 18,000: Here's How We Get There

2013 was a banner year for the stock market.  On December 31st, the Dow Jones closed at an all-time high for the 56th time of the year, ending with a total return of over 27%.  

While stocks had their best year since 1997, the economic news did not seem to support such a dramatic increase in stock prices. 

• At the beginning of 2013, Wall Street estimated 8% earnings and dividend growth for the year. Dividends met expectations, but earnings growth was a disappointing 4.5%.

• Sub 2% GDP growth continued for most of the year, and while the unemployment rate fell, much of the improvement was a result of frustrated workers giving up their job searches and thus no longer being counted in the official unemployment rate. 

• Sequestration hit in 2013, reducing Government spending and dragging down already slow U.S. GDP growth by about 0.5% for the year.

• Interest rates, which are typically inversely correlated with stock prices, increased significantly.  The yield on 10-year U.S. Treasury bonds began the year trading below 1.85%. After the Fed began talking about tapering Quantitative Easing (QE), the 10-year started its upward climb to end 2013 just above 3.0%.

• The Government shutdown in mid-October threatened to derail economic recovery and highlighted growing dysfunction in Washington. 

Why Was the Market Up 25%+?

With so much lukewarm economic data, how could the markets have gone up over 25% in 2013?