Why This Real-Money Portfolio Is Holding Up Well

It's built on a foundation of principles that have served investors well for generations.

Feb 2, 2014 at 10:00AM

January was a rough month for the stock market. The S&P 500 dropped around 3.6% in the month, evaporating about $629.9 billion in market value. Like many stock-oriented investments, the real-money Inflation-Protected Income Growth portfolio participated in that decline, but overall, that portfolio held up better than the broader market.

Indeed, while the market fell 3.6% in the month, the IPIG portfolio's total value dropped by only 2.5% in the same month. On top of that, the IPIG portfolio actually bucked the market's continued decline since last week's update, with the portfolio gaining 0.2% in the same week the S&P 500 fell 0.4%. Of course, a week -- or even a month -- isn't much of a trend, and it certainly isn't a guarantee, but it is enough to start asking what the drivers are of that relative stability in these turbulent times.

Dividends, valuation, and diversification
The IPIG portfolio is designed around central principles of dividends, valuation, and diversification. Those aren't unique concepts to this portfolio. Indeed, the IPIG portfolio traces those ideas back to Benjamin Graham's superb book on value investing, The Intelligent Investor. Graham's principles are all about risk management. While he couldn't guarantee the future, his strategy has repeatedly shown itself over time to be a solid foundation for decent risk-adjusted returns.

Diversification: In Graham's work, diversification within stocks largely means to look to buy shares in companies that operate in largely unrelated industries. The benefit of that style of diversification became crystal clear this past week, when IPIG portfolio pick Hasbro (NASDAQ:HAS) fell on news that its archrival toymaker Mattel (NASDAQ:MAT) had a disappointing holiday season .

While Hasbro's own results won't be made public until Feb. 10, the tight connection between the two toymakers' business lines drove Hasbro's shares to respond negatively to Mattel's news. The two don't always move together, but both are heavily dependent on the holiday shopping season. Mattel's news that the U.S. holiday toy market was weaker than expected likely affects Hasbro as well, and that potential industrywide weakness affecting both shows how Graham's diversification helps investors.

Valuation: From a valuation perspective, the IPIG portfolio doesn't search for the "cigar butt"-style deep values that Graham made famous. Still, the portfolio looks for a reasonable price compared with what looks like the intrinsic value of a company before buying shares and is willing to sell if the company's price gets too high versus that intrinsic value.

For instance, energy pipeline giant Kinder Morgan (NYSE:KMI) spent several months as "the stock that might get away" because its market price quickly passed the IPIG portfolio's intrinsic value estimate. Had the IPIG portfolio chased after Kinder Morgan up past that value estimate, it could have paid as much as $41 and change for a stock that now trades closer to $34. Instead, the IPIG portfolio paid around to $36 and picked up $0.81 per share in dividends. That's not quite a positive total return, but it's better than it would have been without the valuation focus.

On the flip side, food-staples purveyor J.M. Smucker (NYSE:SJM) has had a decent gain since being picked for the IPIG portfolio, but it now sports a market price ahead of the portfolio's fair value estimate. While Smucker's peanut butter, jelly, coffee, and other basics should remain staples in people's homes for a long time to come, its stock may get sold by the IPIG portfolio if it rises much higher.

Dividends: Graham's argument that companies should either demonstrate their ability to reinvest cash at a strong rate of return or pay a substantial dividend is central to the IPIG portfolio. Thanks to Graham, a key selection criteria for every IPIG pick is an established track record of paying and increasing its dividends, as evidence of its' leadership's ability to build the business and reward shareholders.

This past week, Scotts Miracle-Gro (NYSE:SMG), the newest pick in the IPIG portfolio, declared its dividend of $0.4375 per share, consistent with the previous quarter's levels. While dividends aren't guaranteed payments, the company's recent trend of paying and raising its dividend puts it ahead of its peers. In addition to the cash itself, dividends are great signaling devices. We'll know this summer whether Scotts Miracle-Gro can keep its business strong enough to keep that trend alive.

All told -- a reason to believe
Graham's principles of dividends, valuation, and diversification don't provide a guarantee of success. Still, as the IPIG portfolio's performance versus the overall market in January has shown, they do give a decent reason to believe that an investor following them can see his or her portfolio hold up reasonably well. Since nobody can predict the future and, as January reminded us, the market can move down as well as up, that's an important consideration for any investor

Put together a portfolio built on those principles, and you may just get one that looks something like the IPIG portfolio. As of Friday's close, the overall portfolio looked like this:

Company Name

Purchase Date

Total Investment (Including Commissions)

Current Value
Jan. 31, 2014

Current Yield
Jan. 31, 2014

United Technologies

Dec. 10, 2012

$1,464.82

$2,052.36

2.07%

Teva Pharmaceutical

Dec. 12, 2012

$1,519.40

$1,695.94

2.85%

J.M. Smucker

Dec. 13, 2012

$1,483.45

$1,638.63

2.41%

Genuine Parts

Dec. 21, 2012

$1,476.47

$1,891.75

2.61%

Mine Safety Appliances

Dec. 21, 2012

$1,504.96

$1,813.68

2.38%

Microsoft

Dec. 26, 2012

$1,499.15

$2,081.20

2.96%

Hasbro

Dec. 28, 2012

$1,520.60

$2,112.16

3.26%

UPS

Jan. 2, 2013

$1,524.00

$1,904.60

2.60%

Walgreen

Jan. 4, 2013

$1,501.80

$2,294.00

2.20%

Texas Instruments

Jan. 7, 2013

$1,515.70

$1,992.80

2.83%

Union Pacific

Jan. 22, 2013

$805.42

$1,045.44

1.81%

CSX

Jan. 22, 2013

$712.50

$914.94

2.23%

McDonald's

Jan. 24, 2013

$1,499.64

$1,506.72

3.44%

Becton, Dickinson

Jan. 31, 2013

$1,518.64

$1,946.16

2.02%

Aflac

Feb. 5, 2013

$1,466.35

$1,695.06

2.36%

Air Products & Chemicals

Feb. 11, 2013

$1,510.99

$1,787.38

2.70%

Raytheon

Feb. 22, 2013

$1,473.91

$2,566.89

2.31%

Emerson Electric

April 3, 2013

$1,548.12

$1,846.32

2.61%

Wells Fargo

May 30, 2013

$1,525.48

$1,677.58

2.65%

Kinder Morgan

June 21, 2013

$1,518.37

$1,428.42

4.82%

Scotts Miracle-Gro

Jan. 3, 2014

$1,974.68

$1,900.48

2.95%

Cash

   

$766.92

 

Total Portfolio

   

$38,559.43

 

Data from the IPIG portfolio brokerage account, as of Jan. 31, 2014.

Why dividends rule
One of the reasons the IPIG portfolio is holding up well is a dirty secret that few finance professionals will openly admit: Dividend stocks as a group frequently 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; Teva Pharmaceutical Industries; Texas Instruments; Union Pacific; UPS; United Technologies; Walgreen; Scotts Miracle-Gro; and Wells Fargo.

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

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers