When you’re not in a bull market for stocks, it’s obviously much more difficult to generate capital gains. That’s why dividends become so important. For me, I like an equity portfolio to have a mix of holdings; some risk-capital trades and some large-caps that pay dividends. I think a stock market portfolio should not just diversify among different industries, but also with different time horizons for investment. I’ll dedicate a certain percentage of a stock market portfolio to short-term trading, medium-term holdings, and several positions that are very long-term in nature that pay dividends. No matter what kind of stock market it is, my preferred strategy is not just to diversify among assets, but to diversify among time frames.
The stock market offers up good opportunities no matter whether you’re in a bull market or a bear market, but different kinds of businesses behave differently on the stock market, depending on whether it’s a bull or a bear. The degree to which a stock performs is directly related to the degree institutional investors are willing to be interested in the story. A company growing its earnings by eight percent per year and paying dividends is going to be much less attractive than one growing 20% per year in a bull market. But, in a bear market, investors’ needs change and consistency becomes king.
I want to highlight for you two businesses that I really admire. I admire them because of the wealth they have created for shareholders and the consistency with which they’ve performed on the stock market. Both of them pay a modest amount of dividends and these businesses are what you might call boring and unexciting. In a bullish stock market, I’d bet most investors would ignore these companies. It would be a mistake, however, considering the consistency with which they make money over time. (See The Dow, S&P 500 & the NASDAQ: Why It’s Time to Ignore Them.)
If you have a chance, pull up a long-term chart (20 years) on Ecolab Inc. (NYSE/ECL). This company, based in St. Paul, MN, started out selling carpet cleaning products to hotels. Now the business sells cleaning supplies, and pest control and maintenance services to the foodservice, hospitality and healthcare industries. It isn’t fancy, but it makes money and the stock has been an outstanding, consistent wealth creator for years. It’s up about 20-fold over the last 20 years (not including dividends) and it’s weathered every shock to the system with demonstrable strength. The stock just hit another new record high and I’m surprised that Warren Buffett hasn’t bought it out yet.
The other consistent wealth creator that I admire is W.W. Grainger, Inc.(NYSE/GWW). This company pays a similar amount of dividends to Ecolab (current yield about 1.3%) and has been an outstanding, consistent wealth producer for many years. Based in Lake Forest, IL, W.W. Grainger is a wholesale distributor of industrial equipment such as electric motors and fasteners. It’s not the kind of business that you get excited about, but that doesn’t mean it hasn’t made a ton of money for shareholders. On the stock market, it just hit a new all-time record high, doubling since the beginning of 2010 and quadrupling since 2004 (not including dividends).
Ecolab and W.W. Grainger are but two examples of outstanding businesses that pay dividends and have created an enormous amount of wealth on the stock market. And they’ve performed consistently and with very little downside historically.
An equity portfolio, in my view, needs to have some boring, but consistent wealth creators in order to smooth out the effects of the business cycle on your holdings. You can trade the stock market for capital gains sure, but, at the same time, it can also pay big-time to hold great businesses that pay dividends. In my mind, a consistent business is just as useful as the next high-tech breakthrough.