October 2, 2015
Virtuous or Vulnerable
While in the midst of a downturn marked by a quarter that had the DOW down the most in 4 years, approximately 8%, how should we evaluate companies in our own portfolios to determine if they are virtuous or vulnerable? One-way to answer that question is to look at the dividends.
Dividends are payments a company agrees to pay its shareholders. These are very important and we count on these payments for our retirees to live on. When a company projects they will increase their dividend then does not do so, it’s a sign the business is potentially vulnerable and a signal to sell. If a company cuts the dividend or ceases to pay one altogether, that confirms the business is vulnerable and the investment will suffer.
Over the long-term (1 – 3+ years), the share price of a company’s stock can also be a good indicator of whether a company is virtuous or vulnerable. What we have seen recently in the stock market and our accounts, however, is considered short-term volatility and not helpful in evaluating the health of companies.
To give an example, take the price of Enterprise Product Partners EPD, a company Josh Peters, CFA from Morningstar believes is virtuous and will increase their dividend on average 6% annually in the future.
We watched the price of this stock fluctuate wildly over the last week only to end slightly higher than where it had started. At one point on the 5-day chart the stock was down -13.92% and the next day marched almost entirely back. Clearly the value of this company did not swing that much in 5 days and using the price of the stock to evaluate this company would have been foolish.
Most of the accounts we manage have income from dividends and interest in the 4 – 6% range. This income is a much better indicator of the quality of our investments than short-term price movements. This is in large part how Josh Peters, CFA, and our firm, monitors the health of the companies we invest in.
Please call us if you’d like help monitoring the income in your own account. We’re happy to share with you the best ways to do this.
Thanks for reading,
Tim & Bruce