Your Money and You: Could This Investment Strategy Be the Best Choice for You? | Exchange places with Tom Bowley

We all face this question when looking to the stock market for a better financial future. Let me start this article by understanding that the stock market is not your only option when it comes to investing in your future (or the future of your children or grandchildren). However, this article will only focus on the stock market.

your choice

There are several factors that can help you decide which investment strategy is right for you. Your age, investment horizon, and ultimate goals will have a big impact on devising your personal investment strategy. But beyond that, you need to consider the level of risk you can tolerate. Not all stocks in the stock market are equally weighted in terms of risk.

Growth stocks seeking capital value

Stocks that rely on strong returns and strong future earnings growth may be suitable for people who are willing to take on higher risks and have enough time (younger age) to recoup losses in the short term. This is especially true if your strategy is consistent with additional future investments. The same goes for current investments. Growth stocks can generate very strong returns in a favorable environment of low interest rates and strong future earnings, but many companies pay nothing out of their current earnings (think dividends). As economic conditions change, valuations can fall sharply as expectations for earnings and growth drop. You don’t have to look that far back (the cyclical bear market of 2022) to see just how far growth stocks can fall in a very short period of time.

For example, let’s look at NVIDIA Corp (NVDA), which has returned 236% over the past year but pays no dividends. It was the leading stock in the NASDAQ 100, along with six other stocks that more than doubled over the past year.

• CRWD: +190.98%
• Meta: +181.64%
• AMD: +157.32%
• PANW: +140.03%
• AVGO: +119.94%
• ZS: +109.56%

It’s these types of profits that make investing fun as a growth stock investor. But this group also has a dark side. To understand the roller coaster ride that your growth stock can take your money on, you only need to look back at NVDA’s performance over the past few years.

I’m sure everyone would have liked to own a lot of NVDA right now. However, the same would not have been said at the end of 2023, when NVDA’s one-year rate of change (ROC) fell close to -60%. Bear markets can be absolutely brutal for growth stocks. That’s because growth stocks’ future earnings growth and earnings growth rates are in contract with economic activity. And if this were the primary factor in valuing growth stocks, it would be very painful. The six-month ROC in September 2023 was also close to -60%. Imagine six months to a year before retirement, your entire portfolio is in growth stocks like NVDA. Then think about the emotional and financial pain and stress this type of decline will cause you. When considering a strategy, you need to consider all possibilities, not just the best possibility.

conclusion: Investing in growth stocks should be considered in every portfolio. Even people who are already retired can have a nest egg that is expected to last for the next 20 years or more. But you won’t need all that money in the first year of retirement. You will need some of the money you save 10 to 20 years or more down the line. Since you won’t need this money for several years, you can invest more aggressively. Historically, growth stocks typically outperform more conservative investment approaches over time periods of 10 years or more. However, deciding how much you should invest in growth stocks will depend on several factors, including your age, investment horizon, personal risk tolerance, investment objectives, and financial goals.

Income investors seeking dividend yield

This is a more conservative strategy that places much more emphasis on paying shareholders in the form of current profits and dividends. These more conservative dividend payers tend to be seen as much more consistent in their earnings picture and much less volatile in their stock prices, but there can certainly be exceptions to this general rule. These investments are generally not subject to much stress from short-term economic issues. Utility companies and real estate companies quickly come to mind. This group cannot completely escape economic concerns, particularly real estate, as it can react to changes in interest rates. However, most investors in these two sectors look to higher income/dividends as their primary reason for investing. To illustrate using a performance chart, let’s compare the price performance of growth areas such as technology (XLK) to more income-oriented areas such as utilities (XLU) and real estate (XLRE) since the current long-term bull market began in 2013.

Although most technology stocks pay little or no dividends, you can see that the opportunities for capital appreciation are clear. But many of the stock market’s big declines have been felt harder in the tech sector. XLU and XLRE offer a much smaller opportunity for capital appreciation because their earnings growth prospects do not fluctuate over the years as wildly as technology companies. However, the relative safety of capital paid out by utility and real estate companies, along with a much higher portion of current profits, is what many income-oriented investors prefer. Their dividends many times compete with U.S. Treasury securities, a much safer form of investment.

Combination of capital value and dividend yield

For many investors, it makes sense to own both capital appreciation and dividend stocks. And here is a group of stocks that demonstrate an important combination of both strategies that could appeal to many investors. It doesn’t have to be one or the other. What about “hybrid” companies with lower dividend yields but strong and fairly sustainable dividend growth rates? Here are three stocks that fit this hybrid label:

Procter & Gamble (PG):

PG is generally considered a defensive, value-oriented stock. I’m not sure the charts necessarily agree with this assessment. Let’s start with the fact that PG has raised its annual dividend for 68 consecutive years. Considering the number of long-term and cyclical bear markets PG has endured, this is a significant achievement in itself. And PG wasn’t a bad grower either. Here is the price chart:

Dividends are paid quarterly, so I’ve changed the chart to quarterly here. You can also extend the chart out to 30 years to see solid increases in capital appreciation and dividends each year. Not only has PG raised its dividend for 68 consecutive years, the average increase since 1994 is 8.6%. There has been a significant surge in these dividend payments, which suggests that as of 2024, dividend payments will continue to increase at the following rate: It must at least keep up with inflation, if not exceed it. Oh, and consider the potential for capital appreciation. Nothing can be guaranteed, but PG has been a very solid investment for a long time. But if you’re a growth investor, PG’s day-to-day moves might bore you. But boredom isn’t always a bad thing. This is especially true when it comes to building financial wealth.

Starbucks, Inc. (sub):

SBUX is another long-term solid grower in terms of capital gains, but long-term investors might be surprised to learn that its dividend yield is currently 2.43%. The price chart below tells its own story in terms of price growth. But check out how quickly SBUX’s quarterly dividend has risen.

While SBUX’s rate of capital appreciation has slowed compared to its early days, its ability to generate profits to pay increasingly higher dividends has not. SBUX has seen its annual dividend increase by an average of 17.76% since the long bull market began in 2013. In recent years the average growth rate has fallen to the high single digits (8-9%), but it is still a very solid annual growth rate. ratio.

Nike, Inc. (of):

NKE has been growing over the years, increasing its annual dividend every year since the beginning of this century. Two prolonged bear markets and three cyclical bear markets demonstrate the company’s ability to boost shareholder weather even in the worst stock market environments. . Check out NKE’s capital appreciation over the years.

Despite underperforming over the past few years, NKE has still been a “10bagger” over the past 15 years, rising from $10 to $100 over that period. However, the rapidly growing annual dividend coupled with the price struggle in 2021 and beyond now offers a dividend yield of 1.45%. Not only has NKE raised its dividend every year for the past 20 years, but the average dividend growth rate has been double digits each year in all but two of those years. During 2009 and 2010, NKE increased its annual dividend by 8.7% and 8.0%.

These hybrid stocks feel the impact of economic activity, but their combination of rising prices and solid dividends and dividend increases should not be overlooked.

For the past few years I have been suggesting sticking to this long-term bull market with a few exceptions (i.e. a cyclical bear market in 2022). In my opinion, betting against these bull markets is a big mistake. Permanent bears continue to dig deeper and deeper holes. In Monday’s free EB Digest article, I will present my arguments to derail the most common reasons for not investing in the stock market now. If you are not yet an EBD subscriber and would like to receive Monday’s free articles, click here to register with your name and email address. No credit card required, and you can cancel your subscription at any time.

Happy trading!

tom