Among the many lessons to be learned by 2013’s stunning stock market performance, one is that dividend-paying blue chips can also experience significant capital gains.
Portfolio strategy can be based on blue chips, but it can also include companies with varied market capitalizations; mixing it up is always useful.
The thing with blue chips is that they often experience long periods of underperformance, even if they are still paying their dividends. Periods like 2013 are pretty rare, but I do think there is enough momentum in this market to carry blue chips a little higher, with gains more likely towards the end of the year.
I still feel that existing winners, especially larger-cap companies that offer dividend income, are the way to go in a slow-growth environment. Top-notch balance sheets, including huge cash balances and the very low cost of capital are a boon to big companies.
The bears are always looking for reasons why stocks should go down, but blue chips have the pricing power and the economies of scale to keep earnings afloat.
Management teams are reticent to make bold investments in new plant and equipment, and the trend of keeping shareholders happy with increasing dividends and share repurchases shows no sign of abating. These are good markets for conservative investors.
The Walt Disney Company (DIS) is one of many blue chips that are worthy of consideration when they’re down. According to this stock’s historical track record, it isn’t down for long. The company’s recent stock chart is featured below:
Chart courtesy of www.StockCharts.com
Disney recently dipped to $70.00 a share when the broader stock market retrenched in January. It was a good buying opportunity, as the company’s earnings estimates for this year and next have been going up across the board. Plus, breaking down Disney’s operational results shows continued strength and profitability in its theme parks. (See “Growing Cash Positions Make These Two Companies Attractive.”) The stock is fairly priced given its outlook.
I also like NIKE, Inc. (NKE) a lot. The company has delivered excellent financial growth over the last several years, and its outlook is solid and similar to Disney’s. NIKE is another one of those blue chips that you can watch and look to accumulate when it’s down.
Blue chips are the cornerstone of portfolio strategy, especially for retirement accounts and those who use dividend income for living expenses. There should be an allocation for more aggressive plays, but large-cap dividend paying stocks should be the backbone. I’m referring to the kind of business whose earnings per share are growing faster than the rate of economic growth combined with the prevailing rate of inflation.
Given current information, the next major correction in the stock market should be a buying opportunity for new money.
At this particular point in time, stocks (including blue chips) are mostly fully priced and still trading very close to their highs with a lot of good news built into expectations. It’s still a time to reap from the market’s fundamentals, but I’d sit on the sidelines with new money for now, as February’s reversal was pronounced.