The thing about large-cap investing—and most stock market investing, in general—is that periods of capital gains are often met with long periods of non-performance.
A great investment with a long history of making money for stockholders is Johnson & Johnson (JNJ). But even this blue chip pharmaceutical/consumer products company has experienced long periods with nearly no capital gains (1975 to 1985 and 2002 to 2012, in recent history).
Action in the broader market is a big reason for non-performance of individual companies. The Procter & Gamble Company (PG) acted similarly on the stock market during the same period.
Back in 2000, the company had a quarterly earnings miss during the height of the technology bubble. The position was cut in half and took five full years just to recover.
That stock market experience is a good reminder that even so-called “widow” and “orphan” blue chip stocks are susceptible to major share price volatility and non-performance. (See “Blue Chip Stocks Expensive at This Point.”)
And depending on your time horizon for investment, the market cycle has a tremendous influence on total equity returns.
It also illustrates that investment risk with stocks, even the most stable of businesses, will always be inherently high due to the fact that prices are determined by a secondary market system (i.e. non-private ownership).
Therefore, given the perpetual cycle of volatility and only relative pricing of stocks at any given time, one of the single most important factors influencing total equity market returns is dividends. And their importance and percentage weight comprising total market returns grows significantly with duration.
Also illustrative in the stock market’s breakout at the beginning of 2013 is the fervor to which institutional investors will bid dividend paying blue chips. Changes in sentiment affect speculative stocks to a greater degree, but the desire for earnings (and dividends) safety in a slow-growth environment is a trend with staying power. Stocks recently just experienced a rotation back to blue chips.
If annual gross domestic product (GDP) growth accelerates, say to more than four percent, then the stock market cycle will be much more conducive to growth stocks. But this doesn’t seem to be in the cards in the near-term outlook, which is why relative price momentum still favors established dividend-paying blue chips.
Companies like Johnson & Johnson, 3M Company (MMM), and even Microsoft Corporation (MSFT) are poised for more capital gains. And they can do so with much less investment risk.
Even aggressive investors should consider blue chip stocks as meaningful positions within portfolios. Total returns from dividend reinvestment (which can be done for free) add up to be significantly greater than simple returns.
And in a slow-growth environment, institutional investors are much more likely to stick with this group because corporations have the cash and strong balance sheets to keep investors happy with continuing share repurchases and increasing dividends.
Blue chip investing isn’t as boring as the returns since 2013 illustrate. While stocks have mostly been trendless so far this year, dividend-paying blue chip stocks are still the place to be.