This Is the Toughest Part of Investing

This past week was a tough one for the overall market and the real-money Inflation-Protected Income Growth portfolio. The iPIG portfolio lost more than $1,150 in market price since last week's update, as the S&P 500 dropped about 2.6% in that same window of time.

The market's drop, while significant for a week, isn't all that big of a deal. The level where the S&P 500 finished Friday was seen as recently as Feb. 10, just a couple of months ago. Still, for investors who have forgotten what volatility feels like or who are unsure of their holdings, the week's drop served as a painful reminder that the market moves both up and down. Keeping your wits about you while the market moves against you may be the toughest part of investing.

What happened?
Among iPIG selections, only fast-food titan McDonald's (NYSE: MCD  ) avoided the carnage. McDonald's gained as its free breakfast coffee promotion took hold at the same time that Yum! Brands' (NYSE: YUM  ) Taco Bell breakfast menu launched to tepid real-world reviews. Breakfast is an important meal in the fast-food industry, and until we get real financial data to indicate how this particular battle is playing out, all we'll have to go on are anecdotal perspectives.

Aside from McDonald's rise, the iPIG portfolio's cash position remained the same, and everything else in the portfolio lost market value on the week. Still, with a market value that is 34% ahead of what the portfolio started with in December 2012, and still slightly up on the year, last week's drop doesn't seem much out of the ordinary.

What really counts
The iPIG portfolio's investment criteria are based on a small handful of key factors, including:

  • Dividend payments, past dividend growth, and the potential for continued dividend growth.
  • Balance sheet strength -- especially the company's debt compared to its equity.
  • Reasonable prices based on fundamentals-based valuation estimates.
  • Some level of diversification to protect the overall portfolio against industry-level meltdowns.

So long as the companies in the portfolio fit those key criteria, a lower market value has little meaning for the portfolio.

Within the next week or so, for instance, we expect to hear from energy pipeline giant Kinder Morgan (NYSE: KMI  ) on plans for its dividend. Kinder Morgan's dividend has been at $0.41 per share for the past two quarters, but the company has announced a 2014 dividend target of $1.72 for the whole year. That's higher than the $1.64 you'd get by multiplying that $0.41 quarterly payment by four.

To hit its target, Kinder Morgan needs to increase its dividend, but to assure its dividend is sustainable, the payment needs to be sufficiently covered by cash flow. From this outside investor's perspective, watching how the company manages its dividend around those conflicting needs will be incredibly instructive. It will also be more useful information than merely watching what its stock price does.

Overall, only two iPIG picks are down in price since being selected for the portfolio: Kinder Morgan and lawn care titan Scotts Miracle-Gro (NYSE: SMG  ) . Scotts Miracle-Gro is the portfolio's newest selection, picked in late December and bought in early January, and it's in an incredibly seasonal business. The company is only now entering its busy period, and only time will tell whether it has another successful summer.

If Scotts Miracle-Gro does have a successful season and follows its recent trends, we can expect one more dividend at current levels, with potential for an increase around August. Still, as with Kinder Morgan, looking at both Scott Miracle-Gro's dividend and how well it is covered will convey far more useful financial information than merely glancing at its stock price changes alone.

Is this the best way to tough it out?
The focus on the fundamentals and those key principles of dividends -- valuation, balance sheet, and diversification -- are what keep the iPIG portfolio invested despite the market's doldrums. The drops still happen, but they're significantly easier to stomach thanks to adhering to those principles. Put together an entire portfolio based on those fundamental principles and you might wind up with something similar to the iPIG portfolio, which finished on Friday looking like this:

Company Name

Purchase Date

Total Investment (Including Commissions)

Current Value
April 11, 2014

Current Yield
April 11, 2014

United Technologies (NYSE: UTX  )

Dec. 10, 2012

$1,464.82

$2,050.74

2.07%

Teva Pharmaceutical (NYSE: TEVA  )

Dec. 12, 2012

$1,519.40

$1,912.54

2.53%

J.M. Smucker (NYSE: SJM  )

Dec. 13, 2012

$1,483.45

$1,603.61

2.46%

Genuine Parts (NYSE: GPC  )

Dec. 21, 2012

$1,476.47

$1,944.65

2.72%

Mine Safety Appliances (NYSE: MSA  )

Dec. 21, 2012

$1,504.96

$1,985.40

2.18%

Microsoft (NASDAQ: MSFT  )

Dec. 26, 2012

$1,499.15

$2,156.55

2.86%

Hasbro (NASDAQ: HAS  )

Dec. 28, 2012

$1,520.60

$2,306.09

3.21%

United Parcel Service (NYSE: UPS  )

Jan. 2, 2013

$1,524.00

$1,925.40

2.78%

Walgreen (NYSE: WAG  )

Jan. 4, 2013

$1,501.80

$2,570.40

1.96%

Texas Instruments (NASDAQ: TXN  )

Jan. 7, 2013

$1,515.70

$2,114.06

2.67%

Union Pacific (NYSE: UNP  )

Jan. 22, 2013

$805.42

$1,086.42

2.01%

CSX (NYSE: CSX  )

Jan. 22, 2013

$712.50

$952.34

2.14%

McDonald's (NYSE: MCD  )

Jan. 24, 2013

$1,499.64

$1,588.64

3.26%

Becton, Dickinson (NYSE: BDX  )

Jan. 31, 2013

$1,518.64

$2,001.24

1.96%

AFLAC (NYSE: AFL  )

Feb. 5, 2013

$1,466.35

$1,642.41

2.43%

Air Products & Chemicals (NYSE: APD  )

Feb. 11, 2013

$1,510.99

$1,957.38

2.68%

Raytheon (NYSE: RTN  )

Feb. 22, 2013

$1,473.91

$2,602.80

2.51%

Emerson Electric (NYSE: EMR  )

April 3, 2013

$1,548.12

$1,831.20

2.63%

Wells Fargo  (NYSE: WFC  )

May 30, 2013

$1,525.48

$1,778.96

2.50%

Kinder Morgan (NYSE: KMI  )

June 21, 2013

$1,518.37

$1,356.18

5.08%

Scotts Miracle-Gro (NYSE: SMG  )

Jan. 3, 2014

$1,974.68

$1,882.88

2.97%

Cash

   

$999.88

 

Total Portfolio

   

$40,249.77

 

Data from the iPIG portfolio brokerage account as of April 11, 2014.

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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.


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