Even though the Dow Jones Industrial Average has reached record highs, investing hasn't got any easier. When the markets make a major move higher, investors always run the risk of buying at the top.
It's called chasing momentum and it can be damaging to your portfolio.
That's what happened to Apple (Nasdaq: AAPL) shareholders who jumped in at $700 only to watch as the price later dropped to less than $420/share. With little change in the company's outlook, Apple investors who bought near the peak managed to lose 40% in a bull market.
But the truth is you don't have to chase the market. There is a safer, and in the long run, more lucrative approach.
The stocks to buy are what I call "heirloom stocks."
These are stocks you buy, hold and watch them grow-steady earners you can rely on to fund a growing prosperity in retirement, or leave to your grandchildren knowing that the expenses of their lives will be safely covered.
What's an Heirloom Stock?
Heirloom stocks are from a select group of 82 stocks listed on the NYSE or Nasdaq. Their key characteristic is that they have not only paid dividends for 30 years or more, but that they have increased their dividends in every year single one of those years.
These are the gems I call my heirloom stocks.
The longest of these has a history of dividend increases that extends back 59 years, to 1954. But all 82 of them have track records that go back to at least 1983. Surprisingly, there aren't a lot of borderline cases, either. Only two stocks have track records of between 20 and 29 years.
These are the stocks that should be an important base of any portfolio, especially one used for retirement purposes.
As investments, heirloom stocks have the following advantages:
- By definition, they are dividend-paying stocks with an investor-friendly management.
- They have a strong commitment to shareholders in recessions. After all, with their 30-year track records, management has a strong incentive to maintain dividends–even in tough times.
- On a case by case basis, they provide considerable protection against inflation.
- Their annually increasing dividend generally moves the stock price higher over time.
- Their dividend track record dictates a conservative strategy which means management has to always be thinking about the long term.
- Over a 20+ year period, these stocks provide high yield and high overall return. Admittedly, the initial yield on your investment may not look too exciting at first but it rises over time, almost always much faster than inflation.
- They provide increasing income as well as capital growth.
- Most heirloom stocks currently have ratings that are not excessive compared to the 17x P/E ratio of the current S&P 500.
- Because of their steadily increasing income, they provide both the ideal retirement and legacy stocks.
- You never need to sell them if the company maintains its track record. In principle these are one-decision stocks, with no guessing games involved.
Where to Find Heirloom Stocks
In all, there are 82 to choose from, with yields ranging from 0.8% to 11.3%.
But you shouldn't chase the really high yields, which generally suggest the track record of dividend increases could be in severe danger.
Instead, you should look for a minimum yield of 2% — after all, increasing the stock's yield over 30 years and ending up with a 1% yield is not very impressive or useful. You also shouldn't chase very high price-earnings ratios – even Heirloom Stocks can become overpriced in this market!
The key is to buy stocks that will maintain their track record of boosting their dividend.
You should look carefully at dividend cover here; dividends should represent no more than 50% of earnings, unless earnings are unusually depressed – that gives the dividend a lot of room to expand without becoming endangered.
In this context the 20-year dividend growth is a key number. A stock that grows its dividend by 2-3 times over this period barely beats inflation, while 8-10 times dividend growth is good and achievable.
By and large, if the dividend increases by, say, five times over 20 years, the stock price will rise by a comparable percentage and you will overall have an excellent investment. In fact, by the end of the period you should be receiving an income of more than 10% on your initial investment.
Ideally, your stock should engage in an inflation-proof business. For instance, banks aren't inflation-proof because their assets are denominated in nominal dollars, but insurance usually is.
Finally, you should check the company's own return on equity. A 15% to 20% return shows that the company can maintain superior returns, while a return below 10% in a normal year suggests the company may be running into difficulties.
Three Heirloom Stocks to Buy Now
With those criteria in mind, here are three heirloom stocks to add to your portfolio:
- Procter and Gamble Co. (NYSE: PG), the consumer products company, has increased its dividend every year since 1954. It yields around 3.0% and its P/E is 17.5 times. The company's dividend has increased 8.2 times since 1993 and its return on equity is 17.5%. As heirloom stocks go, PG is top quality.
- Emerson Electric Co. (NYSE:EMR), provides electrical engineering products and services. It has increased its dividend every year since 1957. Its yield is 2.9% and its P/E is 20.4 times. The company's dividend has increased 4.6 times since 1993 and its return on equity is 20.1%. Again, a top quality Heirloom Stock, albeit a little expensive at the moment.
- 3M Company (NYSE: MMM) has increased its dividend every year since 1959. It has a yield of 2.5%, and a P/E of 16.4 times. It has enjoyed a less exciting 2.9 times dividend increase since 1993 but the consumer price index is up only 62% in that period. However, its return on equity is a stellar 26.6%. It may not be rapidly growing, but still makes for an excellent long-term investment.
All of these are stocks you can buy now–even in these high-flying markets. In a time and place in the not too distant future you'll be glad you did.
[Editor's Note: Martin's long-tested strategy also involves a select stable of companies paying extraordinarily high dividends. We're talking annual yields of 10%, 15%, 18% or more - the highest you'll find without taking on enormous risk.
And now for a limited time, you can get immediate full access to his Permanent Wealth Investor model portfolio for just $99. But that's only a small part of this story. The same deal includes a "test drive" all of our premium services but one. That's $27,500 in research, for just $99! You can go here for the details]
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