Mission: Describe to a “risk-averse” investor an investment platform that approximates the total return of the S&P 500 Index and carries less risk. This will be accomplished using our Goals (as described below) in our future blog posts.
* Goal 1: Design and monitor what we will call the growing perpetuity index by selecting companies that have high investment value using these five criteria:
a) member of the 65-stock Dow Jones Composite Index;
b) dividend yield is equal to or greater than yield on S&P 500 Index;
c) 10 or more years of annual dividend increases;
d) S&P Quality Rating of A- or higher;
e) company’s bonds carry a BBB+ or higher S&P rating.
ITR’s benchmark will be the S&P 500 Index. S&P does not make its index available for investment but SPY is an exchange-traded fund (ETF) that mimics the S&P 500 Index and trades like any other stock on the New York Stock Exchange. SPY went live on January 29, 1993, so ITR can compare the total return of any stock we choose to the total return of SPY. This allows us to make an “apples to apples” comparison between SPY and any stock in our growing perpetuity index as far back as January 29, 1993.
Bottom Line: The S&P 500 Index dates to 1926 and is the most widely recognized “high bar” of stock investors. We propose to use a higher bar that carries less risk of collapse in a market crash.
* Goal 2: Provide examples of bond mutual funds and US Treasury bonds that ameliorate (hedge) stock market gyrations. In other words, the main risk to owning stocks (deflation) cancels the main risk to owning bonds (inflation). Bond investments will be compared to stock investments and SPY over time periods dating back to 1993. Research has shown that returns from different asset classes tend to even out over time but stock prices fluctuate 4-5 times as widely as US Treasury bond prices.
Bottom Line: Any investor who values capital preservation needs to balance her stock holdings with bond holdings. (see Week 9)
* Goal 3: Know all S&P 500 stocks that meet criteria b) through e) as stated above in our Goal 1.
Bottom Line: ITR readers need to know all S&P 500 stocks that pass our high quality screen, those that might soon pass the test, and those that might soon fail to pass this test. (see Week 27)
* Goal 4: Highlight the reasons why value-style stock picking requires a “buy-and-hold” approach – one that combines dividend re-investment with “dollar cost averaging” through regular additional stock purchases. The wisdom of this approach is based on “compound interest”, which means that dividends are paid on previously reinvested dividends. The enormous value of these two tools—buying more stock regularly with dividends and buying stock on the cheap with continued automatic purchases during a market crash—can only be assessed by comparing total returns over a period of many years.
Bottom Line: There are two freakish accounting gimmicks that allow disciplined investors to build wealth over time, wealth amounting to several times their out-of-pocket investment.
