Did You Make the Same Mistake?

By Marc Lichtenfeld, Investment Director

Monday, March 25, 2013

One of the first lessons I learned about investing had nothing to do with the markets.

In my first job out of school, I was a junior assistant marketing whatever at a credit union. It was the early 90s and there was a recession. My boss was a 30-something-year-old VP with a drinking problem. But she could market the heck out of that credit union.

She grew our membership manifold, explaining to me that the time to spend and grab market share is during a recession when everyone in the industry is cutting back on marketing.

She was the ultimate contrarian.

I’ve applied that lesson to investing. As real estate melted down, my wife and I picked up investment properties. In 2009, when investors were bailing on their stocks and plowing everything into cash, I put my cash to work and bought stocks with both hands.

Most investors weren’t that lucky (or smart) and are just now getting back into the market.

In fact, in February of 2012, when they should have been buying stocks, investors pulled $1 billion out of stock mutual funds. And this February, as the markets close in on record highs, investors went on a buying spree, stashing some $550 million in stock mutual funds last month.

In other words, investors are returning to stocks after the market has already more than doubled.

While sentiment has improved significantly, it’s not at extreme levels yet. Think back to the dot-com boom, the real estate boom, or the Great Recession. Those were extremes.

Doesn’t Matter

I can’t tell you if we’re on the verge of a bear market, correction, or another 100% rally. For my purposes (and probably yours if you’re reading this column), it shouldn’t matter.

Investing for the long haul means ignoring all the noise, whether it’s market action, talking heads, or magazine covers.

When you take a sensible approach to investing with your eye on the long term, good things happen.

It’s not exciting mind you. But it works, year after year, decade after decade. And that’s my focus – to help you make money and prepare for, or live better in, retirement.

The key is to own what I call Perpetual Dividend Raisers – companies that raise their dividends every year. Stocks like Colgate-Palmolive (NYSE: CL), The Coca-Cola Company (NYSE: KO) and Proctor & Gamble (NYSE: PG).

Warning – you’re not going to impress anyone at a cocktail party when you sing the praises of your favorite stock that makes dishwashing liquid and toothpaste. But here’s how those three stocks performed over the last 10 years, most of which encompassed what is being called “the lost decade” because of a zero return in the stock market.

During that time period, Coke raised its dividend an average of 10% per year. Colgate, the boring toothpaste company, boosted its payout by an average of 13%. Proctor & Gamble’s annual raise was 11%. And these companies have been doing it forever.

On average, the three of them have raised their dividends every single year for 52 years.

That goes back to 1961… when a gallon of gas was $0.27, Alan Shepard became the first American in space and John Fitzgerald Kennedy was inaugurated as President of the United States.

That was a long time ago.

Money Machines

What makes these “boring” stocks exciting is how much money investors could have made on them. I don’t care if the company makes paper towels or technology for mobile devices; it’s hard to argue with the 9% to 13% compound annual growth rates of the three companies.

And best of all, they did it while most stocks went nowhere.

Even more impressive is that these are conservative stocks. Investors are not sticking their necks out when they buy these kinds of names.

Even during the Great Recession, Dividend Aristocrats, which are stocks that have raised the dividend every year for 25 years or more, were positive over 10 years. And by a lot.

In the decade ending in 2008, the depths of the recession, Aristocrats were up 40%. In contrast, the S&P 500 was down 9%.

Most investors chase the hottest trends. They buy stocks when they’re going up. And sell their stocks when they’re going down.

It’s the exact opposite of what you’re supposed to do.

There are lots of ways to invest. But the only way I know of that has consistently made money is to invest in stocks that raise their dividends every year.

You don’t need to zig while others are zagging. The ultimate contrarian move is to stay calm and hang on to great stocks while others are trying to figure it out.

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