Durable Dividends

Own Blue Chips, Don’t Trade Them

Nick Ward

56 postsOctober 29, 2021

Oh all of the classic stock market cliches, I think one reigns supreme as far as its relevance to the dividend growth investor: “Time in the market is more important than timing the market.”

Simply put, if I had to boil down generating wealth in the markets into 3 words, they would be: “Own blue chips.”

Own them, don’t trade them.

And, with that in mind, I wanted to dedicate this week’s durable dividends article towards discussing why it is that I am 100% content to own (not sell) the admittedly overvalued blue chips which currently litter my portfolio.

First of all, I should note that the vast majority of the market appears to be expensive right now.

Right now, the S&P 500 trades for approximately 21x forward earnings expectations. This is well above the S&P 500’s trailing 5 and 10-year average P/E ratios of 18.3x and 16.4x.

The market’s current multiple represents a 15% premium to the 10-year average and a 28% premium to the 5-year average.

To a certain extent, I think these premiums are justified.

We’ve experienced a tremendous rally since the COVID-19 trough in late-March of 2020, in large part, because of expectations of a reflationary rally playing out across the globe in the coming years as we move past the pandemic period.

On a macro level, earnings growth has been quite strong throughout 2021 and I expect that trend to continue into 2022 and 2023. At a high level, above average growth prospects should result in above average valuations. Therefore, I’m not here to argue whether or not the markets should experience a pullback, pushing their macro multiples back down towards historical norms.

I’m not even here to argue whether or not it makes sense to buy individual stocks at today’s elevated levels. This article isn’t going to be for those who have money burning a hole in their pocket, looking to invest. This article is for investors who have positions in wonderful companies that have run up to all-time highs in recent months and are beginning to question whether or not it’s time to ring the register.

It seems like every day – across the various services that I write for – I come across individuals who’re looking to lock in profits.

Elevated premiums increase downside risk (in the short-term at least) and therefore, I always begin my response to these individuals, “You know what, no one ever went broke taking a profit.”

I’m sure that there are situations where taking profits and taking the most conservative route makes sense for certain individuals. However, when we’re talking about best-in-breed stocks, I quickly follow up that sentiment with a message that I believe is even more important to consider, especially if we’re talking about a long-term investing horizon…

To me, when we’re talking about high conviction blue chips, the risk of missing out on long-term returns is greater than the downside associated with near-term valuation issues.

In this piece, I will use Microsoft (MSFT) to more clearly paint this picture. Microsoft recently reported its Q3 earnings, it recently increased its dividend, and the stock recently rallied to a new all-time high, pushing MSFT shares into the dividend growth spotlight. Due to Apple’s sell-off this morning, Microsoft has re-taken the title of world’s most valuable company, with a market cap north of $2.4 trillion dollars.

But, for the sake of this argument, I think it’s important to note that the message here applies to any number of highly valued blue chips in today’s market.

My personal journey with MSFT began years ago, before the stock’s recent resurgence driven by the cloud-centric growth focus on CEO Satya Nadella. I accumulated the vast majority of my MSFT position back in 2015 when this was an unloved “old-tech” stock trading for less than 15x earnings and sporting a dividend yield of nearly 3%. At the time, the market feared Microsoft’s best days were behind it because of the secular headwinds facing PC growth since the world was trending towards mobile devices. However, I bought into Nadella’s vision for the company and therefore, I bought into MSFT stock very early on in his leadership tenure.

Flash forward 6 years and it’s clear that Nadella has been a stunning success. Now that Jeff Bezos has stepped down from his CEO role, I believe that Nadella is the best CEO on Earth at the moment. And therefore, even though the price-to-earnings multiple attached to MSFT has doubled since I began buying shares, I continue to sleep very well at night with what has become a very overweight position, because of the confidence that I have in the direction that Microsoft’s leadership is steering the company.

During its last 5 fiscal years, Microsoft has posted earnings-per-share growth of 19%, 17%, 22%, 21%, and 38%, respectively.

The pandemic didn’t slow this company down. During the worst of the COVID-19 sell-off, Microsoft didn’t get particularly cheap (relative to its average long-term P/E ratio) and to me, this speaks volumes.

If MSFT didn’t lose its luster during one of the most precipitous sell-offs of all-time, then I don’t see any reason for the stock to see significant multiple compression during a bull market.

During Microsoft’s most recent quarter, the company’s revenue increased by 22% on a year-over-year basis, its operating income grew by 27%, its net income increased by 24%, and its non-GAAP earnings-per-share came in 25% higher than they were during the third quarter a year ago.

In short, this company continues to compound its fundamentals at an extraordinarily fast and reliable rate, proving that the “law of large numbers” doesn’t appear to apply to this multi-trillion dollar company.

This growth plays the starring role in my bullish argument to own the stock over the long-term.

I believe that MSFT is likely to continue to grow its top and bottom lines at strong double digit rates moving forward over the medium-to-long-term and therefore, the stock’s present valuation doesn’t concern me.

At $330/share, MSFT is trading for more than 40x trailing earnings. That’s a lofty figure, without a doubt. But, assuming that MSFT continues to compound its bottom line at a ~20% clip, it won’t take very long at all for the forward earnings to represent a much more attractive valuation relative to the current share price.

And the fact is, overvaluation can remain in place for very long periods of time in the market.

Economist John Maynard Keynes is famous for saying, “The markets can remain irrational longer than you can remain solvent.”

In other words, we don’t have any idea how long bubbles will last. And therefore, even if you consider a stock like MSFT to be in a bubble in the short-term, it’s certainly possible (and even plausible) for this name to trade with a 30x-40x premium for years and years and therefore, the risk of attempting to sell out and buy back lower is massive.

Conservative value investors have been making the argument that MSFT has been expensive for about the last 5 years or so (since late 2017, MSFT shares have constantly traded with a P/E ratio north of 25x). However, during this period of time MSFT shares have generated capital gains of 442%.

This is what I’m talking about when I say that missing out on future returns is a bigger risk than avoiding exposure. No one knows what the future holds, but looking at the growth that MSFT is generating across its various operations, combined with the strength of its balance sheet, and the generous nature of its shareholder returns, I wouldn’t be surprised to see the stock generate more triple digit returns during the next 5-years as well.

This is why I have zero plans to sell any of my MSFT shares (barring some sort of unforeseen circumstances) even though I acknowledge that they’re expensive.

To me, attempting to trade in and out of wonderful companies like Microsoft is a blatant over-complication of the investing process. There’s no need to do this. Oftentimes, the simplest solution is the best one. This isn’t a hot take. It’s not a statement that is going to go viral and generate a ton of clicks. However, I believe investors are best off when they simply buy and hold high conviction (dividend) growth plays.

Generating wealth doesn’t need to be exciting. The process doesn’t need to be sophisticated. And that’s the best part about it. Time is our greatest resource in terms of the compounding process and patience is our best tool to ensure financial success.

Disclosure: Nicholas Ward is long MSFT.

Nick Ward

56 posts

View all my Posts

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.

What Happened in October Stays in October?

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

Own Blue Chips, Don’t Trade Them

Nick Ward

56 postsOctober 29, 2021

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Own Blue Chips, Don’t Trade Them

56 postsOctober 29, 2021

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