Durable Dividends

Don’t Be A Lemming. You’re Better Than That.

Nick Ward

56 postsJanuary 3, 2022

I just finished up my 2021 year-end review article for the January edition of The Intelligent Dividend Investor newsletter, which included taking a look at the macro data related to the S&P 500 and seeing that the major index remains fairly overvalued.

The current forward price-to-earnings ratio applied to the S&P 500 is roughly 21x. This is well above the trailing 5 and 10-year average P/E ratios of the S&P 500, which come in at 18.5x and 16.6x, respectively.

This implies that the current premium is ~13% above the 5-year average and ~21% above the 10-year average.

The markets rallied in the final weeks of the year and currently sit near all-time highs. So, with this in mind, it’s no wonder that so many investors are feeling cautious right now.

What’s more, due to the relative overvaluation that we’ve seen throughout the 2020 and 2021 COVID-19 rebound periods, I’ve seen a trend of investors and analysts alike seemingly giving into FOMO (the fear of missing out) and lowering both their quality and valuation standards when it comes to the stocks that they’re looking to buy.

In other words: greed is causing cash to burn holes in the pockets of certain individuals out there.

And therefore, in the first Durable Dividends article of the new year, I wanted to attempt to tamp down these greedy emotions and point out that allowing FOMO to dictate decision making is likely to lead towards poor long-term results.

When thinking about this piece, several very common (likely, to the point of being cliché) investment phrases came to mind.

Often, I try to avoid such phrases in my writing…however, when it comes to proper value investing practices, I do agree with many of them.

Therefore, in terms of this piece, and the sentiment that I’m trying to express, I think that it’s impossible to have too much of a good thing.

What I’ve attempted to do here is string a bunch of potentially overused phrases together into a single, hopefully salient argument for the benefits of disciplined value investing.

With that being said, I think it’s important to remember that the stock market is a market of stocks.

In other words, even though the major indexes appear to be overvalued, there will always be attractive deals to take advantage of.

Therefore, I think it’s totally fine to put capital to work in a market like this. A consistent dollar cost averaging strategy has proven effective for millions of investors over the long-term. However, that doesn’t mean that we ought to be buying what everyone else is. Instead of giving into FOMO blindly following momentum, I’m of the belief that investors should always let attractive fundamentals drive investment decisions.

For instance, several of the purchases that I made during the month of December are already up nicely, in large part, due to multiple expansion. These rising multiples are more than justified when looking at recent fundamental performance and future growth expectations. That is to say, the gains that I’ve recently produced appear to be sustainable (and likely to continue moving forward).

With the idea that there are always bargains to be found in mind, I want to venture onwards towards the next market cliché: the idea that the market is largely driven by an unruly herd of irrational investors…in the short-term, at least.

Human beings are flawed beasts. We’re largely ruled by emotion, fear and greed presiding prominently upon each shoulder with easy access to our gullible ears. This irrational aspect of human nature leads to herd mentality.

When market rallies occur, no one wants to be left behind. When we see others banding together, oftentimes we join in, without truly asking ourselves whether or not their cause is a rational one. As the thunderous herd picks up momentum in the markets, bubbles form.

And, you know what happens to bubbles eventually…they pop.

The boom/bust cycle of the market, from a macro perspective, is interesting because it proves that this thunderous herd is not made up of mighty beasts, but instead, whimsical little lemmings.

Investors who are not able to control their basic instincts and remove themselves from the irrational herd are dooming themselves to irrationally run off of cliffs, again and again.

And the sad thing is, many investors can’t seem to help themselves.

This is why the average retail investors’ long-term performance is so poor.

In short…while we all know that investors should buy low and sell high, the emotional foundation of human nature often inspires people to do just the opposite.

People often join the herd and chase momentum, buying equities at higher and higher prices (and oftentimes, more speculative and speculative valuations).

And then, when the enviable crash occurs, they become fearful and sell low (often, because they didn’t understand the fundamental value of what they owned in the first place).

When the next bubble begins to form, this cycle starts all over again.

When I was little and tried to justify a poor decision that I made by saying that I did something because someone else did as well, my parents would say, “If so-and-so was going to jump off a bridge, would you?”

When I watch markets from a macro perspective, it appears that not enough children were chided in this way.

Now, I can understand why it’s so easy for investors to be fooled by stocks trading with irrational valuations attached to them.

It’s true that markets can stay irrational for long periods of time. Highly priced assets can continue to climb higher. Cheaply priced stocks can stay in the doldrums for ages.

During these periods of time, it’s easy to begin questioning one’s research, looking at the herd, and asking the question, “Do they know something that I don’t?”

However, let me assure you, that the answer to this question is “No” the vast majority of the time.

That’s why Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University who is often called “the Dean of Valuation” says that those are the 7 most dangerous words in finance (referring to “Do they know something that I don’t?”).

Famed economist John Maynard Keynes has also touched upon this topic.

Keynes is typically credited with the quote, “Markets can stay irrational longer than you can stay solvent.”

Keynes died in 1946; however, this quote about the irrational nature of markets remains true today.

But, just because markets are irrationally and inefficient in the short-term doesn’t mean that investors should lose hope.

I agree with the father of modern value investing, Benjamin Graham, who highlighted the belief that while in the short-term, the stock market is a “voting machine”, given enough time, iit becomes a “weighing machine”.

In other words, while short-term share price movements are driven by investor sentiment, over the long-term, fundamentals will win out.

This is the core principle of my entire investing strategy.

When buying dividend growth stocks, I always look for the highest quality companies trading with the most attractive valuations (and therefore, the widest margins of safety).

By doing so, I not only reduce my downside risk, but I’m also taking steps to increase my upside potential (via multiple expansion via mean reversion) as well as the size of my passive income stream (lower share prices equate to higher yields on cost).

This relatively basic strategy of accumulating high quality assets at low prices seems simple. And, it is. However, it does require a contrarian mindset and therefore, its execution might not be as easy for some as it sounds.

However, I firmly believe that all investors can overcome their weakness, when it comes to becoming a prisoner of the moment and giving into either fear or greed, and therefore, separate themselves from the herd and put themselves in a position to generate strong long-term results in the market.

Doing so simply requires that one never lose sight of value or of the fundamentals that dictate it.

Keynes also said, “There is nothing so disastrous as a rational investment policy in an irrational world.”

We can’t change the world at large. We can’t change the behavior of others. We can’t change the irrational sentiment that drives the market. But, we can ensure that we don’t participate in irrational and dangerous trades.

So, with all of this being said, I hope that you’ll start off 2022 by taking a step back, taking a deep breath, and reflecting upon your personal weakness and emotional impulses.

Think about the mistakes that you’ve made in the past (you don’t have to be shameful about these, all investors have experienced losses) and learn from them.

Also, take the time to consider your success and why it occurred, so that you can replicate it.

No one is perfect, but we can all strive to be better. As we accrue knowledge and experience, we could become confident and strong enough to be able to survive without the perceived protection of the herd.

This is especially the case once we realize that the herd doesn’t provide much protection at all – in the stock market, anyway.

In conclusion, don’t be like the average investor who makes disastrous decisions and destroys wealth with poor (irrational) investment decisions. Don’t fall prey to those who are shilling fearful or greedy advice. Don’t settle for a spot in the herd which is destined to run off of a cliff, over and over again. Don’t be a lemming. You’re better than that. I know it!

Nick Ward

56 posts

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Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.

Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.

Let’s Make 2022 a Truly Valuable New Year

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Don’t Be A Lemming. You’re Better Than That.

Nick Ward

56 postsJanuary 3, 2022

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