Week 207 - Starter Stocks

Situation: The stock market is pricey and the bond market is becoming less pricey. This suggests that stock prices are going to plateau for a while because bonds will be paying higher interest. Dividends will no longer be the best way for you to get an income from your investments.

Mission: Find stocks that are suitable for a newcomer to stock-picking. 

Execution: We can’t change our stripes, so we’ll fall back on the two most important considerations for a newcomer to stock-picking: (1) start with large companies and (2) confine your attention to those that are Dividend Achievers, which is S&P’s name for companies with 10 or more yrs of annual dividend increases. Risky stocks need to be excluded from the newcomer’s portfolio, so we eliminate any companies that either have a S&P bond rating lower than A- or an S&P stock rating lower than A+/M (see the Table). And, we exclude companies with a 3-yr history of declining operational metrics according to research done to produce the annual Barron’s 500 List with one exception. Any company that ranked in the top 250 on both the 2015 and 2014 lists is acceptable. Metrics from the BMW Method are also used to exclude companies with price trends that don’t track the market and companies that are predicted to lose 40% or more in the next Bear Market. Companies that lost more than the hedged S&P 500 Index (i.e., Vanguard’s Balanced Index Fund, VBINX) during the 18-month Lehman Panic are also excluded, as are companies in the most cyclical industries: Energy, Basic Materials, Finance, and Information Technology.

Bottom Line: We were able to come up with only 4 “starter stocks”: Nike (NKE), NextEra Energy (NEE), Johnson & Johnson (JNJ) and PepsiCo (PEP). You would need to dollar-average equal amounts of money into each stock every month online to achieve the best gain during bull markets and the least loss during bear markets. In other words, diversify your bets and make small bets often rather than big bets occasionally.

Risk Rating: 4

Full Disclosure: I dollar-average into all 4 of these stocks.

NOTE: metrics highlighted in red indicate underperformance vs. our key benchmark, which is the Vanguard Balanced Index Fund (VBINX). Metrics are brought current for the Sunday of publication.

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