How Long Can You Remain Solvent?

Turns out quite a long time, as long as you don't borrow on margin and you invest in a way that rewards you for your patience.

Jan 26, 2014 at 2:00PM

The famous economist John Maynard Keynes once remarked, "Markets can remain irrational a lot longer than you and I can remain solvent." He was absolutely correct. No matter what you think a company's stock may be worth, and no matter how solid the evidence you have for that valuation estimate, the market will do what the market will do.

Oh sure, given enough time, a company's market price and its true value will eventually get within spitting distance of each other. Unfortunately, neither you, I, nor anyone else knows exactly when that will happen or at what level the two shall meet. That doesn't make investing a futile effort, but it does mean you need to follow an investing strategy that keeps you solvent and invested for quite a long time.

Staying solvent and patient
Keynes liked to speculate with margin, which makes it difficult to ride out the market's volatility. After all, if the market's short-term move forces a margin call, it doesn't matter whether your investing thesis is ultimately correct if you don't have the cash to make good on that call. For the real-money Inflation-Protected Income Growth portfolio, one of the keys to remaining solvent is that the portfolio doesn't use leverage. As a result, the IPIG portfolio can wait essentially forever for prices to adjust.

In addition, as the IPIG portfolio looks to buy companies that pay and increase their dividends, it actually gets paid for its patience, which also makes it far easier to do all that waiting. When the market throws its periodic fits, like the one it threw since last week's IPIG update, those payments go a long way toward helping fuel the patience needed to stay invested. Dividends are not guaranteed payments, so when a company maintains its dividend, it's a sign that its business remains reasonably healthy -- no matter what its stock happens to be doing.

Kinder Morgan (NYSE:KMI), North America's largest midstream energy company, recently declared a $0.41-per-share dividend, consistent with last quarter's level. Kinder Morgan goes ex-dividend on that payment later this week, providing cold-hard cash rewards for its investors in spite of the market's volatility.

Continuing that theme, Texas Instruments (NASDAQ:TXN) goes ex-dividend this upcoming week on a recently declared $0.30-per-share dividend, consistent with last quarter's level. Texas Instruments, the semiconductor giant behind those ubiquitous graphing and scientific calculators, actually raised its dividend more than once in the past year. While that's an awesome and unexpected reward for its shareholders, chances are the company will return to its more traditional once-per-year increases.

Not to be left out, on Friday, J.M. Smucker (NYSE:SJM), the iconic jam and jelly maker, declared its own $0.58-per-share dividend. Smucker's dividend remains consistent with its previous payment -- but it still offeres some decent cash rewards for the financial risks investors take for owning its stock.

Sure, these payments -- and the dividends of every other IPIG selection -- are measured in pennies per share per quarter. Still, there's reason to believe those payments can keep coming as long as the businesses behind the stocks are healthy, no matter what the market does to those shares. And that cold, hard cash provides a great incentive to be patient while the market does its thing and moves stock prices around, even when it moves those prices down

All told, a solid portfolio in a volatile market
Dividend payments, a history of dividend growth, and the potential for that dividend growth to continue are all key factors that make companies worth owning in the IPIG portfolio. Over time, those dividends make a difference, in part by helping investors remain patiently invested while the market moves share prices around. The following table shows the IPIG portfolio as of this past Friday's close.

Company Name

Purchase Date

Total Investment (Including Commissions)

Current Value
Jan. 24, 2014

Current Yield
Jan. 24, 2014

United Technologies

Dec. 10, 2012

$1,464.82

$2,012.40

2.11%

Teva Pharmaceutical

Dec. 12, 2012

$1,519.40

$1,631.34

2.97%

J.M. Smucker

Dec. 13, 2012

$1,483.45

$1,665.49

2.37%

Genuine Parts

Dec. 21, 2012

$1,476.47

$1,893.82

2.61%

Mine Safety Appliances

Dec. 21, 2012

$1,504.96

$1,879.56

2.30%

Microsoft

Dec. 26, 2012

$1,499.15

$2,024.55

3.04%

Hasbro

Dec. 28, 2012

$1,520.60

$2,204.61

3.12%

UPS

Jan. 2, 2013

$1,524.00

$1,926.60

2.57%

Walgreen

Jan. 4, 2013

$1,501.80

$2,289.20

2.20%

Texas Instruments

Jan. 7, 2013

$1,515.70

$2,018.65

2.79%

Union Pacific

Jan. 22, 2013

$805.42

$1,029.84

1.84%

CSX

Jan. 22, 2013

$712.50

$890.80

2.29%

McDonald's

Jan. 24, 2013

$1,499.64

$1,510.88

3.43%

Becton, Dickinson

Jan. 31, 2013

$1,518.64

$1,939.50

2.02%

Aflac

Feb. 5, 2013

$1,466.35

$1,681.83

2.38%

Air Products & Chemicals

Feb. 11, 2013

$1,510.99

$1,814.07

2.66%

Raytheon

Feb. 22, 2013

$1,473.91

$2,379.51

2.50%

Emerson Electric

April 3, 2013

$1,548.12

$1,827.28

2.64%

Wells Fargo

May 30, 2013

$1,525.48

$1,682.76

2.64%

Kinder Morgan

June 21, 2013

$1,518.37

$1,489.74

4.62%

Scotts Miracle-Gro

Jan. 3, 2014

$1,974.68

$1,912.96

2.93%

Cash

   

$766.91

 

Total Portfolio

 

 

$38,472.30

 

Data from the IPIG portfolio brokerage account, as of Jan. 24, 2014.

Why dividends rule
Above and beyond the cash in your pocket, one of the dirty secrets that few finance professionals will openly admit is that dividend stocks as a group handily outperform their non-dividend-paying brethren. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, simply click here.

Chuck Saletta owns shares of Aflac; Air Products & Chemicals; Becton, Dickinson; CSX; Emerson Electric; Genuine Parts; Hasbro; J.M. Smucker; Kinder Morgan; McDonald's; Microsoft; Mine Safety Appliances; Raytheon; Scotts Miracle-Gro; Teva Pharmaceutical Industries; Texas Instruments; Union Pacific; UPS; United Technologies; Walgreen; and Wells Fargo.

The Motley Fool recommends Aflac; Becton, Dickinson; Emerson Electric; Hasbro; Kinder Morgan; McDonald's; Mine Safety Appliances; Teva Pharmaceutical Industries; UPS; and Wells Fargo and owns shares of CSX, Hasbro, Kinder Morgan, McDonald's, Microsoft, Raytheon, and Wells Fargo.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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