Going Large-Cap for Capital Gains? Yep, and It Works

Going Large-Cap for Capital GainsBack in April of 2012, oil and gas giant ConocoPhillips (NYSE/COP) created spin-off Phillips 66 (NYSE/PSX) from its downstream energy assets. In the energy business, the term “downstream assets” refers to refining and marketing. For every two shares held in ConocoPhillips, shareholders received one free share of Phillips 66. It was a great bonus for shareholders, and it’s a gift that keeps on giving. Phillips 66 listed on the stock market around $34.00 a share last April; now it’s at $52.00, and the stock pays a dividend.

Every once in a while, the stock market offers up a bonus like this one. A big company sells off or splits up its different businesses, and this can create a lot more wealth for shareholders. The former Kraft Foods Inc. recently did this, and now shareholders have two dividend paying businesses to contend with. Many investment banks and consulting firms advise big corporations to do this, but not only because of the great fees spin-offs create; the whole idea is to let the stock market decide what individual businesses are worth, because in a conglomerate, it’s difficult to place a value on any one division.The company’s stock chart is featured below:

Phillips 66 Chart

 Chart courtesy of www.StockCharts.com

I was a stockbroker in the late 1990s, and that was a time when the stock market was roaring. The trading action was so good, day trading was a cinch. I saw all kinds of stocks fly high and then crash. I saw all kinds of initial public offerings (IPOs) hit the market and then crash in value. When the bubble was really building, people off the street would call in to get their hands on any new Internet stock going public. The stock market action was surreal, and so was the action of investors.

I left that business before the bubble burst, because I wasn’t a good salesman. The firm I was with charged outrageous commissions to customers for simple trades, and the spread on the bonds they sold was fat. But they did one thing that I always admired; they always advised their brokers and clients to approach the stock market conservatively. While Internet-related stocks were flying high, the firm’s research department advised clients to buy large-cap, dividend paying stocks. In their model stock market portfolio, there would always be a few aggressive names; but for the most part, they picked blue chip, dividend paying stocks and their long-term track record was very good.

After years of analyzing every kind of stock from large- to micro-cap, I’ve learned that you can do just as well in the stock market by playing the right large-cap, dividend paying companies, as you speculate in the smallest penny stocks. And you can do so with a lot less volatility and investment risk.

The firm I worked for always advocated dividend stocks to its clients, and I picked up on it. Nowadays, the stock market is basically trendless, and the days of five-percent gross domestic product (GDP) growth are gone. I continue to believe that dividend paying stocks are the way to go in this kind of market. If you don’t need the income, then take up new shares through dividend reinvestment.

Every business experiences its own business cycle over time. The heady days of Microsoft Corporation (NASDAQ/MSFT) and Intel Corporation (NASDAQ/INTC) are over. (See “It’s Been Twelve Years—It’s Still a Bear Market for Stocks.”) But look at a company like Union Pacific Corporation (NYSE/UNP). This railroad company has been paying an increasing dividend for decades, and the position, not including dividends, has more than tripled on the stock market since 2005. For me, this says it all. For all the speculating and all the investment risk, owning the right dividend paying stock is probably a better strategy for the vast majority of stock market investors.