Is There a Bubble Brewing?

The real-money Inflation-Protected Income Growth portfolio saw yet another gain last week, this time picking up around $711 -- or better than 2.3% of the $30,000 it started with in December 2012. The iPIG portfolio closed the week with a total value of $34,940.55, or a better than 16% return in less than half a year.

In ordinary markets, that sort of return would be stupendously strong. But in this market, it was merely so-so. The S&P 500 actually fared a bit better, rising a bit more than 18% in that same time frame. Leaps that fast can almost be expected coming out of a bear market, but stocks have been rising almost nonstop since hitting bottom in early 2009. A gain that large in a bull market that long in the tooth raises the specter of yet another asset bubble.

So is there a bubble?
There is certainly the potential of a bubble. The Federal Reserve's incredibly loose monetary policy is a key part of the reason stocks are up, as the Fed is holding down interest rates below inflation on "safer" assets like short-term U.S. Treasuries. That forces investors looking for real returns farther out on the risk curve, thus adding fuel to the market's fire. Should the Fed take its foot off that gas, there's a very real possibility that stocks will drop a bit in the absence of that strong stimulus.

Still, valuations are nowhere near as high as they were at the peak of the dot.com bubble. Additionally, many companies significantly tightened their cost structures during the recent recession and are seeing improved current profitability as a result. Higher profit levels should naturally translate to higher stock prices, all else being equal.

All told, it's a mixed bag. And in reality, if a bubble were that easy to project, none would ever form, as people acting in their own self-interest would get out while the getting is good, thus keeping the bubble from inflating in the first place. But whether or not there's a bubble, the iPIG portfolio is designed around the cash-generating capabilities of the individual companies that it holds, rather than general asset price levels. As long as those operations remain strong, the portfolio should wind up fine.

And what's going on?
Portfolio pick Air Products & Chemicals (APD -0.68%) paid its dividend on Monday of last week, adding $12.07 to the iPIG portfolio's coffers for the 17 shares it owns. That was Air Products & Chemicals' first dividend at its new, higher rate of $0.71 per share, a welcome increase for investors.

The iPIG portfolio also received $17.20 in dividends for the 43 shares of Hasbro (HAS 2.79%) stock it owns. That was also Hasbro's first dividend at its new higher rate of $0.40 per share. Hasbro "prepaid" its February dividend in December, so this was also the first ever Hasbro dividend for the iPIG portfolio.

Speaking of increasing dividends, this week, the iPIG portfolio expects to get $0.28 per share in dividends for the Texas Instruments (TXN 1.34%) stock it holds. That's a nice increase from the $0.21 the company paid out in the previous quarter, and it's especially notable since Texas Instruments increased its dividend after only two quarters at the old level. Most dividend increases happen annually, and to get one after just two quarters is worth highlighting.

And thanks in large part to the market's rise, both Teva Pharmaceutical (TEVA 0.37%) and Aflac (AFL 0.40%) swung from losses to gains for the iPIG portfolio since last week's update. Those two companies' swings from red to green mean that every current selection in the portfolio finished last week worth more in the market than it was purchased for. That may or may not last, but it sure feels nice while it's happening.

All told, it was a very successful week for the iPIG portfolio. Granted, much of that success came from the market's continued euphoria, but a large part of success in investing comes from having a strategy you're willing to follow with real money. You have to be in it to win it, after all, and the iPIG portfolio's focus on the ability of the companies it owns to continue to pay and increase their dividends is what makes it possible to ride the market's movements up as well as down.

iPIG portfolio tracker as of May 17, 2013

Data from the iPIG portfolio brokerage account, as of May 17, 2013.

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