There are many different investing strategies that investors use. The purpose of this article is to start with a specific strategy, which is called Dividend Growers. Not sure what investing in the stock market means? See my first post here
This investment strategy focuses on companies that show strong growth, constant profit increases and obviously, annual dividend increases. In general, dividend growers are likely going to keep on making money and generate less stress for shareholders. However, before we start we need to stress that there’s one very important factor that creates a lot of investment return and it is not related to what companies you pick, only to your sector selection. I will explain that below:
The secret is in your sector allocation:
Before we start on what a strong company is to invest in. I would like to bring your attention to sector allocation. If you ever read any investing 101 books, they will all tell you that asset allocation is the prime determiner of your investment returns. If you were afraid of a recession in early 2020 and put most of your money in consumer staples and gold, you outperformed the market by a wide margin.
When investing with a strategy of dividend growth, the belief is that nobody should invest more than 20% of their money in a single sector. The more you add to a sector past 20% the more volatile your portfolio may be. When the market drops, it affects all sectors. However, each crisis will be particularly harmful for a few industries. The problem is that we never know which ones will suffer the most. It could be tech stocks (1999 tech bubble), banks (2008 financial crisis) oil & gas business (2015 oil bust, 2020 COVID-19) or entertainment, travel, leisure and retailers. The key is to hold some of the best companies from each industry sector. Here’s my view on how each sector can help you build a stress- free retirement portfolio.
Core sectors include companies you should consider first. It doesn’t mean they must all be in your portfolio, but they are less likely to be impacted by a global recession. Each one has its unique characteristics.
Technology: Dividend growers in this sector are usually “old techs” that are dominant in their industry. They are sitting on significant cash and cash flows and are often ignored by retirees due to their low dividend yields. Interesting enough, they go through the Covid-19 recession without breaking a sweat. Cash is king during most recessions, and tech like Microsoft, Apple, Cisco< Texas Instruments, ETC are generating plenty of cash.
Financial services: Banks are at the center of our capitalistic system. They can get too greedy (2008) but in general banks type of stocks will offer a source of dividends. However, there are good finds in large asset managers (such as Blackrock) and payment processors, Visa and Mastercard that could be elements of many successful portfolios. I am less interested in banks and life insurance companies that must deal with low interest rates.
Consumer defensive: Classic and boring companies fly under the radar during an economic boom, but they suddenly become market favorites during recessions. We all need to eat, brush our teeth and clean our house. Personally, I could take some of the volatility, however, it would be nice to have some downside protection when things go haywire. Procter & Gamble Coca Cola, Colgate and Palmolive definitely don’t need an introduction to most people.
Healthcare: A lot of the big healthcare companies or big pharma that spend billions of dollars annually on research and developments. The whole company is dependent on the pipeline, which new drugs are going to come to the market, it makes it hard to keep a dividend and invest new money in the business. nonetheless there are some great companies in this space the most famous ones are Jonson and Jonson (JNJ) Pfizer (PFE). The other type of business is the medical device business the famous ones are Abbott (ABT) medical device companies are becoming very innovative, there might be a lot of potential there.
Consumer Cyclicals: The name says it all when the economy is strong. These companies will be very strong. That would be Auto manufactures for example GM Ford and you could find them by investing in companies that supply auto parts. For example, Gentex (GNTX) (GPC). Classic restaurants will do much better when there’s a hungry stomach and full wallet. Starbucks (STBX) will be able to sell more and cross sell many more products when the economy is great McDonalds (MCD) would also do better in good economic times. Finally, sporting goods like Nike (NKE) and VF Corporation (VFC) might be companies of interest.
Industrials: This sector is another category in the industrial sector. It has a wide variety of sub sectors that are not linked together. Since each industry has a different down time You got to pick up each sector when they are cheap A classic example are the railroads that were very cheap in 2015-2016 when oil crashed UNP Canadian Railroad ETC From time to time MMM becomes cheap to you must be patient and pick the business while it’s cheap and wait.