Week 247 - S&P 500 Dividend Achievers That Have Tangible Book Value And Are In Defensive Industries

Situation: When the stock market is shaky, an investor’s thoughts turn to safety. You need an algorithm. Which stocks do you want to stick with, and maybe buy more of, while they’re on sale? More importantly, how did you get in this jam in the first place? 

Mission: Come up with stocks likely to weather down markets without falling behind in up markets. Using a baseball term, we’re looking for a way to hit singles regularly.

Execution: Step #1 is to list all the Dividend Achievers (companies that have increased their dividend annually for at least the past 10 yrs) in “Defensive” S&P industries of the S&P 500 Index (Consumer Staples, HealthCare, Utilities, Communication Services). Step #2 is to eliminate companies that have no Tangible Book Value (TBV), meaning companies whose Liabilities have a higher dollar value than their Tangible Assets. Step #3 is to eliminate any that have an S&P Bond Rating lower than A- or an S&P Stock Rating lower than A-/M. Step #4 is to eliminate any that don’t have enough revenue to appear on the 2015 Barron’s 500 List. Step #5 is to eliminate any whose stocks haven’t been traded on a public exchange for more than 16 yrs.

Administration: There are 11 stocks that meet our requirements for reasonable and prudent investing (see Table), an algorithm for all seasons. But that begs the question: Why do so many of us avoid reasonable and prudent investing and instead “play” the market? After all, 95% of stock-pickers would do better (in the long run) simply by dollar-averaging into the bond-heavy Vanguard Wellesley Income Fund (compare VWINX at Line 16 in the Table to VFINX at Line 19). So, we’re not really picking stocks just to make money. We also need the outlet, a way to bring our “animal spirits” safely to life and hope to make our lives a little grander. The trick then is to analyze why we invest the way we do, and decide who we hope to impress. 

Bottom Line: “It will fluctuate.” That’s how JP Morgan answered a young man’s question about the stock market. But stocks of some companies fluctuate less. Those companies are in “defensive” industries: Consumer Staples, HealthCare, Utilities, and Communication Services. To avoid that sinking feeling in the pit of your stomach whenever the market swoons, pick A-rated stocks from among Dividend Achievers in those industries. Focus on companies that are valued as much for their real assets as their brand. 

Risk Rating: 4

Full Disclosure: I own shares of ABT, JNJ, NEE, HRL, KO, and WMT.

NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX, our key benchmark. Total Returns in Column C of the Table date to 9/1/2000, a peak of the S&P 500 Index.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com