I have long-term investments in crypto assets. I’ll be the first to admit that these digital currencies are extremely speculative and frankly, it’s difficult to formulate intrinsic values. However, I think it can make sense for dividend growth investors to allocate small portions of their portfolios to alternative assets (whether that be crypto, precious metals, absolute return funds, art, wine, etc) if you believe in their long-term wealth creation potential.
A lot of the time, these types of assets post performance that is not correlated to equity performance which means they’re a nice way to diversify one’s wealth.
When it comes to crypto, I was a skeptic at first. These assets didn’t contribute directly to my passive income stream and therefore, for the longest time, I wasn’t interested in owning them. I didn’t invest for years, watching from the sidelines as several of my friends did quite well in the space. Therefore, when the most recent bitcoin crash occurred (from April to May of this year, bitcoin’s price fell by nearly 50%) I decided to spend some time researching the asset class as a whole to see what all of the fuss was about.
A lot of the literature that I read, specifically regarding the decentralized finance (de-fi) movement and the potential for crypto to serve as a strong inflation hedge in the event that inflation (or even hyper inflation – which, I don’t believe to be a likely occurrence in the United States) begins to erode the value of the USD, convinced me that these assets deserve a spot in the speculative growth portion of my personal portfolio.
Therefore, I’ve been building exposure to a diversified basket of digital assets, pleased to have had the opportunity to do so with 30%, 40%, and even 50%+ discounts attached relative to prior highs.
I don’t check on the prices of my crypto assets very often because I know that they’re extremely volatile and that for the most part, short-term momentum (whether it be positive or negative) in investable assets are generally driven by market sentiment – which happens to be irrational more often than not – and therefore, tracking the daily swings is not an effective use of my time.
I simply accumulate digital assets every time my wife and I receive a paycheck, lock the assets away in a digital “vault”, and then get back to my work evaluating equities.
This morning, when I logged into my crypto brokerage, I was pleased to see massive gains since my last login. During the last month, Bitcoin is up approximately 25%. Ethereum is up roughly 47.5% during the last month. Cardona is up an amazing 124.1% during the last month. Cosmos is up 90.2%. Tezos’s monthly performance is nearly as impressive, up 78.5%. And Solana is the best performer of the bunch (that I own), having posted gains of 251% during the last month.
Granted, due to the volatile nature of this asset class, all of these gains could disappear tomorrow. And this gets to the heart of today’s article: it’s better to be grateful than greedy.
Obviously, with the benefit of hindsight, I wish that I had sold out of all of my stocks, mortgaged my house, and put all of my emergency cash from my bank accounts and put that money into my Solana position a month ago. If I had done that, I’d be able to retire today. But, no one is a soothsayer and placing a bet like that would have been gambling, not investing.
Prudent, intelligent investing involves conservative risk management. Crypto assets don’t trade on clear fundamentals like equities do and therefore, I continue to believe that investors should focus 99% of their energy on identifying the highest quality blue chips trading at fair (or better) valuations.
While seeing large short-term gains like the ones that I’ve experienced in my crypto accounts lately are great, I do not believe that they should inspire investors to drastically change plans and abandon disciplined asset allocation thresholds and/or valuation standards for new investments.
Seeing gains like these, it’s easy to allow greed to take hold. It takes a lot of self awareness and discipline to silence that greedy little devil on your shoulder, but ultimately, that’s the key to long-term success in the markets.
Chasing momentum is not something that consertvative value, income oriented investors should do, even if they’ve personally experienced great success recently with a speculative bet.
In short, be thankful for those big gains, but don’t let greed change your asset allocation strategy because generally speaking, assets with huge growth potential trade with very speculative premiums attached which can result in huge downside as well, in the event that a growth thesis is disrupted or breaks.
The same viewpoint is important to keep in mind when it comes to equity investment (which is why I’m writing this article in the first place). Crypto inspired this story and I think my recent experience here illustrates the point that I’m trying to make best, but I think dividend growth investors – even those who have 0.00% exposure to digital assets – should pay close attention to the message.
For instance, one of my most recent equity purchases was Scotts Miracle-Gro (SMG).
This is an up and coming dividend growth stock with a 12-year dividend increase streak. The company isn’t perfect, by any means; management is currently dealing with strong inflationary headwinds which have negatively impacted 2022 earnings-per-share guidance and the stock’s Standard and Poor’s credit rating is just BB, which is below my typical standard. However, this company can trace its roots back to the American Civil War, showing the type of longevity that puts my mind at ease. The demand for weed removal from agricultural, commercial, and residential properties isn’t going to disappear anytime soon (if ever). And most recently, management has shown the ability to adapt and evolve, investing heavily in hydroponic assets, providing SMG tailwinds from the fast growing cannabis industry.
SMG has posted EPS growth of 20%, 62%, and 28% during the last 3 years, respectively. There is some fear that the reopening of the economy will hurt growth (being that consumers won’t be stuck at home anymore once COVID-19 ends, and therefore, they won’t be spending so much time in their yards and gardens). However, as I said above, demand for their products aren’t going anywhere and right now, even though analysts are calling for -7% EPS growth in 2022 (primarily because of inflation in the raw materials that SMG uses in its products), the analyst community expects SMG’s double digit growth trajectory to pick back up in 2023 with a consensus growth rate estimate of 17%.
With all of the pros and cons at play here in mind, I arrived at a $153.50 price target (essentially representing a 17.8x multiple on 2022 EPS estimates which is in-line with the stock’s long-term average premium and a level that SMG shares have found consistent fundamental support throughout the last decade).
This price represented a 39.6% discount to SMG’s 52-week highs set back in April of this year. Obviously, due to the large discount required, I didn’t hold my breath while I waited for such significant weakness to occur. But, eventually it did and when my $153.50 target price hit, I happily began to buy shares (by the time I clicked “buy” the trade closed at $153.56).
Discipline and patience paid off, allowing me to buy shares of a former market darling at a price that I deemed to be attractive from a medium-to-long-term risk/reward standpoint.
From there, my plan was to fill out my position by averaging down at -10% increments, adding shares at ~$140, and then again at ~$125, should those opportunities arise.
Because of SMG’s quality concerns (primarily related to its balance sheet), I was pleased to take a slow and steady approach to building this position. I love averaging down into dividend growth blue chips because it not only increases my long-term upside potential, assuming my fundamental growth outlook remains in place, but it also increases my yield on cost while bolstering the size/strength of my dividend income stream.
Since I bought shares several weeks ago, SMG has rallied to the $161 area. It appears like that 17.8x support level has held and although it’s too soon to say with certainty, I may have timed the bottom here well. Truth be told, this saddens me.
Why? Because I haven’t had the opportunity to average down yet, my position weighting is relatively small. But, instead of worrying about an underweight allocation and chasing the near-term upward momentum at play here, I think the same mantra that we’ve discussed throughout this article comes into play…
I know it’s best to stick to my plan. If SMG’s fundamental outlook changes materially, I’ll be happy to adjust my price targets and act accordingly. But, for the time being, I haven’t seen any reason to believe that SMG’s future results will be significantly higher and therefore, buying shares above my current price target would increase my risk.
That’s never the goal. In short, I should just be thankful for my gains.
Remember, it’s far better to be grateful than greedy in the markets.
This disciplined, value oriented mindset is the same one that I use to manage The Intelligent Dividend Investor portfolio. Maintaining a conservative stance has allowed me to build positions of many of the best companies in the market at very attractive valuations. This combination of quality and value has not only resulted in strong returns for the portfolio, but also a perfect dividend growth record since the portfolio’s launch on March 1st, 2020.
It takes months to launch a service like IDI and therefore, throughout the planning period, no one at Wide Moat Research had any idea how bad COVID-19 would be (heck, when we first started building out our website, no one had even heard of the virus). But, the fundamental approach that I took, combined with my focus on quality, protected the passive income stream of subscribers and moving forward, I remain very bullish on the prospects of our holdings.
If you’re looking for more in-depth guidance when it comes to dividend growth investing, come check out The Intelligent Dividend Investor via the link below!
*Disclosure:
I am/we are Long SMG, BTC, ETH2, ADA, SOL, ATOM, and XTZ
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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.
