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Why This Real-Money Portfolio Is Holding Up Well

By Chuck Saletta - Feb 2, 2014 at 9:00AM

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

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 (HAS 2.47%) fell on news that its archrival toymaker Mattel (MAT 1.60%) 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 (KMI 0.54%) 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 (SJM 0.85%) 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 (SMG -0.51%), 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




Teva Pharmaceutical

Dec. 12, 2012




J.M. Smucker

Dec. 13, 2012




Genuine Parts

Dec. 21, 2012




Mine Safety Appliances

Dec. 21, 2012





Dec. 26, 2012





Dec. 28, 2012





Jan. 2, 2013





Jan. 4, 2013




Texas Instruments

Jan. 7, 2013




Union Pacific

Jan. 22, 2013





Jan. 22, 2013





Jan. 24, 2013




Becton, Dickinson

Jan. 31, 2013





Feb. 5, 2013




Air Products & Chemicals

Feb. 11, 2013





Feb. 22, 2013




Emerson Electric

April 3, 2013




Wells Fargo

May 30, 2013




Kinder Morgan

June 21, 2013




Scotts Miracle-Gro

Jan. 3, 2014








Total Portfolio




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

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.

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Stocks Mentioned

The Scotts Miracle-Gro Company Stock Quote
The Scotts Miracle-Gro Company
$81.59 (-0.51%) $0.42
Hasbro, Inc. Stock Quote
Hasbro, Inc.
$80.58 (2.47%) $1.94
Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
$18.69 (0.54%) $0.10
Mattel, Inc. Stock Quote
Mattel, Inc.
$23.54 (1.60%) $0.37
The J. M. Smucker Company Stock Quote
The J. M. Smucker Company
$133.79 (0.85%) $1.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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