Sorry for the delay here…I’m a few days later than usual with this one, but the title (and general thesis) of this piece was too good not to publish it on the 4th of July.
We’ll start with the bad news…
Over the weekend, I’ve seen a slew of headlines (just like this one) which highlight the market’s macro performance during the first half of 2022 as being historically bad. The CNBC article linked above notes that with the S&P 500 falling by more than 20% thus far on a year-to-date basis, this was the worst first half of the year that we’ve seen in 50 years. What’s more, the article points out that traditional defensive portfolio strategies (the 60/40 and the 40/60 portfolio builds…regarding equity to fixed income ratios), which have historically protected investors during volatile times and resulted in consistent positive performance due to the negative correlation between bonds and stocks, has tanked during 2022 as well. On top of that, we see alternative assets, such as crypto currencies and precious metals falling too. Commodities were up for much of the year, but in many instances, they’ve been crushed in recent weeks as well. Energy stocks were the only safe haven in the market during the first half of 2022; however, that’s been a tough place to invest over the last decade or so and therefore, I certainly wouldn’t blame anyone for maintaining an underweight exposure to that sector. Oh, and I should mention that cash is losing ~8.5% of its value as inflation soars. So, that traditional safe haven isn’t working either.
In short, it’s been a tough year to be an investor.
Or, has it?
I suppose, that’s a matter of perspective.
I say this because I recently tallied up my June 2022 dividends and I am proud to say that my passive income stream is at an all-time high!
To be clear, I don’t say this to brag. I’m not unique here. Generally speaking, investors who own…and better yet, regularly accumulate shares of blue chip dividend growth stocks, tend to see their passive income consistently rise. Therefore, one would expect to see a dividend growth investor continually hitting higher and higher passive income marks as time moves forward.
For instance, my colleague at Wide Moat Research, Justin Law, who manages the Dividend Champions List recently published the List’s June 2022 report. In that report he notes that there were 22 stocks on the Dividend Champions List which increased their annual dividends during the month of June…and not a single established dividend growth stock which cut their dividend.
I wanted to write this piece today to really put a spotlight on the message that building wealth and achieving success in the market doesn’t require flashy trading, big home-run investments, or speculative bets.
On the contrary, the relatively boring plan of buying and holding dividend growth stocks continues to work just fine (especially if your focus, in terms of measuring success, is on the size and strength of your passive income stream as opposed to the near-term share price movement of the stocks that you own).
It’s so wonderful to tally up dividends and see them at an all-time high, despite the negative volatility in the markets.
Frankly, seeing this provides me solace and gives me the confidence to go against the grain and continue to buy stocks into the macro weakness that I discussed at the beginning of this article.
The market is down ~20% right now. Therefore, at an index level, equities are ~20% cheaper (many wonderful individual stocks are down much more than that, but that’s besides the point right now). But, I like to look at discounts in the market through a slightly different lens…
Instead of thinking about stocks as ~20% cheaper…I look at it this way: I’m able to acquire ~20% more shares with the same amount of investable capital when making purchases during a bear market.
And therefore…more importantly…the cash that I’m putting to work in today’s market is generating ~20% more dividend payments.
Yes, I realize the difference in perspective here is just semantics (20% cheaper and 20% more shares are one and the same). But the biggest barrier to success in the markets for retail investors is controlling their emotions and making sound, rational decisions (basically, buying low and selling high, as opposed to allowing emotions to inspire them to do the exact opposite) and therefore, any little mental tricks that inspire good investing behavior instead of fearful of greedy mistakes are worth using.
At the end of the day, being consistent, focusing on quality (especially with regard to dividend safety/growth metrics), focusing on valuation (locking in an attractive margin of safety), and regularly accumulating blue chip dividend growth stocks that meet those two parameters is all it takes to build a passive income stream that will snowball into a significant financial force over time.
Consistency is boring, but it’s key.
Most dividend growth stocks aren’t sexy. They’re not often in the headlines. But, the reliable fundamental growth…which translates directly into dividend growth…creates a compounding situation that can become quite exciting, so long as you’re disciplined and patient enough to cultivate it and allow it to prosper.
And as easy as this all might sound, data points towards the fact that most people fail to produce satisfactory results in the market, largely because they fall prey to emotions (fear and greed), oftentimes becoming enamored by the hottest stock or a fearful trend, rather than focusing on the slow and steady compounding that is easily accessible in the equity space.
In other words, they become distracted by the market’s version of fireworks, instead of what matters most.
4 days ago, J.P. Morgan Asset Management published their Q3 2022 “Guide to the Markets” report.
If you’re someone who loves financial metrics, charts, and graphs, this is a resource for you. And, even if you don’t, I still recommend browsing the information that the report provides because this is a resource that I look forward to every quarter because of how well J.P. Morgan presents macro data.
The Q3 report was 71 pages long. But, to me, the most important page of the entire report was page 63 (which I’ll post below).
Source: JPM Asset Management
Looking at the chart, you see that the “Average Investor”, which to me, is another phrase for “Irrational Market Timer” has drastically underperformed just about every notable asset class, index, and portfolio management strategy.
I’ve discussed this image with you all before, but I’m happy to do so again, because it pains me to see that so many retail investors underperform in the markets.
I know that this underperformance means that retirement plans are postponed, vacations are canceled, date nights are avoided, medical care is put off, dreams, such as higher education, are kicked down the road…etc, etc, etc.
All of these things sadden me. I want everyone to live their best lives and while money cannot buy happiness, having enough of it to live comfortably and to have the freedom to pursue one’s passions certainly helps.
Honestly, the reason that I write these posts every week is to try to get inventors in the right mindset to avoid the common pitfalls that lead to the underperformance that J.P. Morgan is highlighting above (newer members here can go back through my Durable Dividends articles on widemoatresearch.com and see the numerous pieces that I’ve written which focus on fundamentals instead of following the irrational herd, which focus on dividends and reliable dividend growth as opposed to getting caught up with anxiously following near-term share price movement, and at an even higher level, highlight the long-term success that the dividend growth strategy has produced for investors).
Looking at the J.P. Morgan data, you’ll see that over the last 20 years, the S&P 500 has produced 9.5% annualized total returns.
That’s definitely not bad.
Speaking of compounding…an investor who grows their nest egg at a 9.5% clip will see the size of their holdings double every 7.57 years.
That might not seem exciting, but it implies that the value of one’s holdings will quadruple every 15 years or so.
I don’t know about you, but I’d be pretty happy to see my portfolio 4x larger in 15 years’ time.
That doesn’t even include additional capital allocation to one’s brokerage accounts. Capital inflows will help to supercharge this compounding process.
Furthermore, since the dividend growth strategy focuses on owning the very best companies from indexes like the S&P 500 (to generate a multi-decade dividend growth streak, companies have to exude extremely high quality metrics), I’m a firm believer that owning best-in-breed stocks will lead to even greater success.
And, when you add in an attractive margin of safety to those types of holdings…well, the long-term prospects become even brighter.
With all of that in mind, I hope that investors can take some time on this long weekend to refocus their perspective on success in the markets, take steps to keep their emotions in check, find little tools and tricks that help them do so, and ultimately, realize that negative volatility in the markets should be viewed as an opportunity, not a threat, to long-term financial success.
Buying blue chip dividend growth stocks into weakness is a great way to accelerate the compounding process that can (and will) lead towards financial freedom (for investors who are disciplined and patient enough to stick with it).
The long-term prospects associated with undervalued blue chips are so bright, in fact, that their brilliance is more significant and stellar than any fireworks displays that you’re going to enjoy tonight.
That acceleration, which is based upon the combination of shareholder returns (dividends and buybacks), ongoing fundamental growth, and eventually, multiple expansion via mean reversion, is all the fireworks that I need in the markets.
This article is intended to provide information to interested parties. As we have no knowledge of individual circumstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended. It does not guarantee that securities mentioned in this newsletter will produce profits or that they will equal past performance. Additionally, we are not an investment advisor and do not offer securities or tax advice. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. Nicholas Ward, contributors and staff members of Wide Moat Research may hold positions in some or all of the stocks listed.
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.
