Outperforming the Market in Uncertain Times

This past week reminded us that we're still living in uncertain times. On the domestic front, Congress failed to agree on a budget for the new fiscal year that begins on Oct. 1. Internationally, a hostage situation at Kenya's largest mall served as a stark reminder that the world can be a violent and dangerous place. The near-term future doesn't look much clearer, either, with a fight over the debt ceiling expected and questions lingering on when the Federal Reserve will start "tapering."

Heightened levels of uncertainty tend to send stocks down, and last week followed that general trend. Still, while the real-money Inflation-Protected Income Growth portfolio did lose a bit more than $315 in value since last week's update, it held up better than the overall market. Indeed, because the market fell faster, the iPIG portfolio can now claim a total return ahead of the SPDR S&P 500,n investable proxy for the S&P 500, since its December 2012 launch.

Dividends count for more than just cash
The iPIG portfolio's total return since it launched in December has been 22.6%. That's about 0.4 percentage points higher than a market-tracking portfolio of the Spiders with dividends reinvested over the same same time frame. The portfolio owes much of that success to the dividends it has received -- not just for the payments themselves, but for the business fundamentals they represent.

The iPIG portfolio tries to buy companies that pay rising dividends and look capable of continuing those payout boosts over time. A dividend pattern like that is nowhere near guaranteed, and companies must possess tremendous discipline and long-term focus to have a reasonable chance of sustainably meeting that goal. And it's that same discipline and focus that gives the companies in the iPIG portfolio a reasonable chance of holding up fairly well, even during uncertain times. After all, if a company looks decently valued, pays a well-supported dividend, doesn't carry too much debt, and appears capable of raising its dividends in spite of that uncertainty, what's the compelling reason to sell?

Steady performance in uncertain times
Those types of companies may not be Wall Street's darlings when the market is rising meteorically, but in times of uncertainty a certain "flight to quality" mentality prevails. It wasn't Microsoft's  (NASDAQ: MSFT  )  superior growth potential that led it to be the top-performing iPIG pick last week, actually increasing in price while the market was down. No, it was Microsoft's top credit rating and recent dividend hike, as well as the realization that the company, though down, is not out.

Similarly, the iPIG portfolio's second-best performer of the week was generic-drug manufacturer Teva Pharmaceutical  (NYSE: TEVA  ) . In spite of recent earnings that failed to live up to expectations, the reality is that people need their medication no matter what the economy is doing. As a global leader in generic medications, Teva is well-positioned for uncertain times, as people concerned for their health will switch to a generic drug long before they give up their medication altogether.

The cash keeps rolling in
In the end, though, a lot can be said for the power of a cash dividend to soothe investors' nerves when the market gets frothy. This week, three iPIG portfolio picks are expected to pay their dividends. Even better, those payments are expected to arrive in the iPIG's coffers regardless of what uncertainty next spooks the market.

On Monday, Becton, Dickinson (NYSE: BDX  ) is paying the iPIG portfolio $0.495 per share -- its fourth quarterly dividend at that level after an increase about a year ago. That dividend is particularly important, as the company is a medical-devices maker that faces a new tax on revenue as part of Obamacare. That the company increased its dividend a year ago and maintained it in the face of that new tax showcases the power of those payments to cut through the clutter.

On Tuesday, both Union Pacific (NYSE: UNP  ) and Genuine Parts are expected to pay their dividends. Union Pacific's $0.79 dividend is $0.10 higher than it was last quarter, while Genuine Parts' $0.5375 has been steady for a few quarters but is still fairly higher than the $0.495 it paid this quarter of last year. Union Pacific's increase is particularly noteworthy because it comes at a precarious time for railroads, especially with regard to the future of coal shipping.

All told, while there are no guarantees in the market, a focus on dividends and the financial strength to maintain and potentially raise those dividends remains the centerpiece of the iPIG portfolio's plan. That emphasis has helped the portfolio perform as well as it has, and it's expected to help the portfolio make rational buy and sell decisions in the future. As of this past Friday's close, here's what that end-to-end portfolio looked like:

Company Name

Purchase Date

Total Investment (including commissions)

Value as of
Sept. 27, 2013

Yield as of Sept. 27, 2013

United Technologies (NYSE: UTX  )

Dec. 12, 2012

$1,464.82

$1,968.48

1.96%

Teva Pharmaceutical (NYSE: TEVA  )

Dec. 12, 2012

$1,519.40

$1,444.76

3.16%

J.M. Smucker (NYSE: SJM  )

Dec. 13, 2012

$1,483.45

$1,781.43

2.21%

Genuine Parts (NYSE: GPC  )

Dec. 21, 2012

$1,476.47

$1,848.97

2.67%

Mine Safety Appliances (NYSE: MSA  )

Dec. 21, 2012

$1,504.96

$1,847.88

2.34%

Microsoft (NASDAQ: MSFT  )

Dec. 26, 2012

$1,499.15

$1,829.85

3.37%

Hasbro (NASDAQ: HAS  )

Dec. 28, 2012

$1,520.60

$2,037.34

3.38%

NV Energy (NYSE: NVE  )

Dec. 31, 2012

$1,504.72

$1,979.88

3.22%

United Parcel Service (NYSE: UPS  )

Jan. 2, 2013

$1,524.00

$1,825.00

2.72%

Walgreen (NYSE: WAG  )

Jan. 4, 2013

$1,501.80

$2,180.40

2.31%

Texas Instruments (NASDAQ: TXN  )

Jan. 7, 2013

$1,515.70

$1,887.52

2.99%

Union Pacific (NYSE: UNP  )

Jan. 22, 2013

$805.42

$939.54

2.02%

CSX (NYSE: CSX  )

Jan. 22, 2013

$712.50

$878.90

2.32%

McDonald's (NYSE: MCD  )

Jan. 24, 2013

$1,499.64

$1,553.92

3.34%

Becton, Dickinson 

Jan. 31, 2013

$1,518.64

$1,798.02

1.98%

AFLAC (NYSE: AFL  )

Feb. 5, 2013

$1,466.35

$1,679.67

2.25%

Air Products & Chemicals (NYSE: APD  )

Feb. 11, 2013

$1,510.99

$1,819.00

2.65%

Raytheon (NYSE: RTN  )

Feb. 22, 2013

$1,473.91

$2,125.98

2.79%

Emerson Electric (NYSE: EMR  )

April 3, 2012

$1,548.12

$1,817.20

2.53%

Wells Fargo (NYSE: WFC  )

May 30, 2013

$1,525.48

$1,538.83

2.89%

Kinder Morgan (NYSE: KMI  )

June 21, 2013

$1,518.37

$1,505.28

4.46%

Cash

   

$488.84

 

Total Portfolio

   

$36,776.69

 

Data from the iPIG portfolio's brokerage account as of Sept. 27, 2013.

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