With stocks still ticking higher, portfolio safety and a strong adherence to risk management is key with the major indices pushing their highs.
Speculative fervor has come out of this market, but really only in the form of profit-taking. In order for stocks to experience a major price correction (which I view as a healthy development for the longer-run trend), the market requires a catalyst, and there isn’t an obvious one right now.
While individual stock selection is always important in portfolio management, generally, share prices move commensurately with each other based on sentiment. Accordingly, investors who own dividend-paying blue chips are just as well positioned if the broader market delivers more capital gains. And at a lot less investment risk to boot.
At the beginning of last year, in these pages, I put together a list of “Super Stocks”—the names of companies that I thought could be welcome in all but the most conservative of portfolios.
A lot of these positions are pushing their highs again. These stocks are back in favor with institutional investors and most have increased their dividends. (See “Super Stocks—Great Companies for Any Stock Market Portfolio.”)
The three positions that have been disappointments are Bunge Limited (BG), The Procter & Gamble Company (PG), and International Business Machines Corporation (IBM).
Bunge is heavily weighted to the agriculture sector, and as every commodity continues to prove over time, pricing, supply, and the business in general are volatile.
Procter & Gamble has a great dividend and that’s what is keeping investors interested. It’s just a very slow-growth story, being so global and mature.
I always follow IBM as a benchmark position, and its financial results are material in terms of helping your market view. But while earnings estimates have been going up for 2015, the company has lost its operational momentum. Keeping up with changes in technology is a tough business. I don’t think I would consider this company if I were building a new equity market portfolio today.
Stocks that have done well—and I believe will keep doing well in a market where institutional investors want portfolio and earnings safety—are Colgate-Palmolive Company (CL), PepsiCo, Inc. (PEP), Canadian National Railway Company (CNI), Johnson & Johnson (JNJ), 3M Company (MMM), Bank of Montreal (BMO), Wells Fargo & Company (WFC), and The Walt Disney Company (DIS).
Stocks like these are still good underpinnings for a long-term equity market portfolio. They offer top-line growth, solid dividends, and good prospects for increasing dividends. They are also great franchises in an environment where capital is looking for earnings predictability.
I would add a stock like NIKE, Inc. (NKE) to the list if I were building a portfolio today. This is a great brand that consistently delivers on its financial promises.
And I would also consider Microsoft Corporation (MSFT), which is experiencing its own operational renaissance. The stock is not expensively priced and its yield is close to three percent.
Building a portfolio of great stocks doesn’t have to be complicated. Business conditions change for individual companies and industries consistently, and as an investor, you need to cull and add positions accordingly.
In today’s slow-growth environment, I think the market will continue to favor existing winners. The stocks featured above aren’t new, but they are paying right now.