Which Investment Strategy Is Best?
When it comes to investing, there are a number of different strategies we might use. In our most recent Big Picture podcast (where we also spoke with Louis-Vincent Gave out of Hong Kong on his macro outlook - listen here), Jim Puplava and John Loeffler reviewed three strategies based on the following types of stocks: the Fab Five, Dogs of the Dow, and the Dividend Aristocrats.
Here's a quick breakdown of each...
This approach primarily employs a momentum investing strategy. While it’s possible to make a lot of money chasing momentum stocks if you get on board early and have the smarts to exit at the correct time, the reality is that both of those are difficult to execute.
The stocks included in the Fab Five currently are the top five performing technology stocks this year: Facebook, Google, Netflix, Priceline, and Amazon.
Facebook is up 30.33% so far this year. The stock doesn’t pay a dividend, and it’s selling at 43 times earnings. What that means is, to purchase $1 of Facebook stock, you have to pay $43 per dollar of profit that Facebook earns.
This year, so far, Google is up 17.4% and is selling at 30 times earnings; Netflix is up almost 23% and is selling at 203 times earnings; Priceline is up 26% and is selling at 44 times earnings; and Amazon is up 25%, paying 176 times earnings.
To compare, the Dow is up only 6% for the year, while the S&P is up 6.5%, and the Nasdaq, which is weighted heavier in tech stocks, is up 12.4%.
“Clearly, if you’re investing in momentum stocks in 2017, you would have beaten the averages,” Puplava said. “(However), these are the kinds of stocks that get clobbered when you go through a market downturn,” Puplava said. “If you’re going to employ this strategy, you’d better know what you’re doing technically.”
Dogs of the Dow
This is a more conservative approach and involves a strategy of picking the top 10 dividend-paying stocks in the Dow, buying these at equal weight of 10% in January, and rotating them annually after the end of December.
This year, the 10 Dogs of the Dow stocks are Verizon with a dividend yield of 5.03%; Pfizer with a dividend yield of 3.8%; Chevron with a dividend yield of 4.1%; Boeing with a dividend yield of 3.1%; Cisco, Coke and IBM with a dividend yield of around 3.5%; Exxon with a dividend yield of 3.75%; Caterpillar with a dividend yield of 3%; and Merck, also with a dividend yield of 3%. Compare this to the dividend yield on the Dow, which is 2.2%.
If an investor put an equal amount of money in each of these stocks, the collective return year-to-date would be roughly about 2% versus the 6% return on the Dow, Puplava noted.
“This year (we’ve seen) … more of a growth and momentum driven market, and it’s been that way since the election,” Puplava said. “The Dogs of the Dow are underperforming. … You’re making money, but you’re not making as much.”
Long-term, however, the strategy does better. The Dogs of the Dow tend to outperform the Dow 71% of the time; the S&P 500 60% of the time; and the Russell 3000 60% of the time, Puplava noted.
This becomes significant over a longer time period. If you were to put $10,000 in the S&P 500 or the Dow in the year 2000 and let it reinvest, compounding in good years and bad, you’d end up with $27,600 at the end of the 17-year period. Compare this with your returns on that same $10,000 had you invested in the Dogs of the Dow: your money would have grown to $46,000 over the same period.
“If you are an investor, you need to develop a philosophy,” Puplava said. “How do you make your investment decisions? This becomes very important to you if you are 5 to 10 years away from retirement. What you’re looking for is a consistent philosophy.”
This approach seeks to put money to work with companies that have consistently raised their dividends over a long period of time. There are 52 companies that have increased their dividend every year for 25 consecutive years, Puplava stated.
These include companies such as Coca-Cola, Proctor and Gamble, 3M, and others. Imagine if you started investing, and every single year you get a pay increase with these dividend-paying stocks, Puplava stated.
A study of the Divided Aristocrats found that from 1991 to 2015, the S&P 500 went up 9.8% a year. If you had invested a dollar in the S&P in 1991, it would have been worth $11.44 at end of 2015. When it came to the Dividend Aristocrats, which went up 14.1% a year over the same period, the study found that your same $1 would have grown to $31.02.
These companies also do well in market downturns, shielding investments from loss. They outperformed the majority of the time when the markets go up, and they outperform on the downside as well.
“In most of the years of a bull market, the Aristocrats either outperform or at least equal the return of the S&P 500,” Puplava said. “In a market downturn like we had in 2008, you lost 15% in the Aristocrats versus 37% in the S&P 500.”
Though there are no guarantees that a given company will always increase its dividend, the strategy provides consistent returns and is less volatile, plus it offers protection in a downturn and superior long-term performance, Puplava noted.
“It’s amazing, (given) how simple this strategy is, how little it’s employed by investors or on Wall Street,” he said.
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