Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. Morningstar Dividend Investor just marked its fifth anniversary. I'm here with editor Josh Peters to talk about what the next five years are going to look like for dividend stocks.
Josh, thanks for joining me.
Josh Peters: Happy to be here, Jeremy.
Glaser: Last week, we talked a little bit about how leverage was something that you didn't see on the radar five years ago that kind of caught you by surprise. Is there anything in the next five years you're going to be particularly worried about when you're thinking about stocks to buy for the portfolio?
Peters: I think a continuing theme for the economy, for the financial markets, is going to be bubbles. It's going to be the presence of cheap money, inflating asset prices, and that having knock-on effects that will be negative for the real economy, and it's kind of hard to know where they're going to pop up.
You know, commodities, some have speculated perhaps gold is in some kind of a bubble, or perhaps it would be another energy bubble of some kind, green energy. Technology, if you have the right theme perhaps, there's some reason to believe it could pop up there. I don't think it's going to be a packaged food company or something like that involved, but it's very important to try to avoid these systemic excesses that crop up because you could make a lot of money on the upswing, but when they crack, you know, you could lose 80%-90% of your money and not be able to recover from it.Read Full Transcript
Glaser: There's always a discussion about if it's even possible to tell that you're in a bubble while you're in the midst of it. What are some signs that you think investors can look at to see, all right, this industry is just way out of whack from historical norms?
Peters: Valuations can help, looking at profitability relative to historic norms I think can help. The availability of cheap credit, especially if you see falling credit standards--it's kind of hard to have a bubble without borrowed money, using that to inflate prices.
And a lot of it is just the theme--that you had to be invested in the Internet or in telecom back in 1999. You had to be invested in residential real estate in 2005 or 2006. By then, the idea of stocks almost seemed like why are you doing that, you can make 15% a year on your house?
When you see that kind of absolutist logic, that's something you've got to pull back away from because everything in the economy is going to run in a certain level of balance, and when things start to get out of balance, and you hear absolutist claims about here's where you're going to get rich, you'd be stupid not to do this, you've got to move the other direction.
And I say this especially for dividend investors because you can't count on having a lot of stocks that could be 10-baggers. It's just not usual. It's more mature companies, slower to grow, more reasonably valued at the outset that are likely to be paying good dividends when you don't have the opportunity to recover from lots of massive losses like you might have in a much more aggressive strategy.
So you've really got to stay on the straight and narrow, and if it doesn't smell right, stay away from it.
Glaser: You mentioned gold, energy stocks. Are there any other areas that you think potentially could be bubbles right now or you're seeing signs of a bubble forming?
Peters: It's hard to tell at this point. I think it's more a factor that you want to be very careful about, consider very carefully, if you start seeing major moves in one sector, one asset class or another.
We've had a huge run in the stock market over the last 10 months, but that's been off of a very depressed low. It's hard to call that a bubble. If we see, you know, another 50% increase in the stock market from here, I'm more than willing to call that another bubble, at which point you have to think very, very carefully about even if you want to continue to own stocks at all.
At those kinds of extremes, even the most dedicated stock investor might have to think about that.
Glaser: For investors looking at sectors that are going to perform well over the next five years, what would some of your recommendations be?
Peters: I think it's going to be boring stuff. And I'll tell you, that was something that I had a bias toward, boring stocks, boring companies. I mentioned last week Compass Minerals, a rock salt miner, I'd much rather have that than some sort of rockstar telecom or tech stock or something like that.
But the value of those boring stories really, really bore itself out in the downturn. And they weren't going to decline dramatically; they weren't nearly as likely to be forced to resort to a dividend cut. A lot of the most boring companies, they've just gone on raising their dividends even through this crisis.
So boring is one template. What is boring? You know, packaged food is boring; beverages, boring; utilities, boring; pipelines, boring. These are businesses that people have to do business with every day, and they're not going away, they're not really the flight of somebody's mood of the moment.
If they're soundly capitalized, you can find management that is sharing the rewards of the business directly with shareholders through dividends, specifically through large and growing dividends. I don't think it needs to be any more complicated than that.
So, the last five years have really sharpened my focus on what works. It's provided some templates for things that I want to avoid, such as a lot of leverage, a lot of dependence on potentially what might be an economic bubble, but it's also provided some good lessons of what to look for. And we've already restructured the portfolios, really, to focus on those kinds of names.
Glaser: Dividend investors should probably shun most excitement, then.
Peters: I think so. I think the point of a dividend strategy is not necessarily that it's going to make you the highest absolute profit, would never promise that to anybody. If you focus on dividends, you're never going to own that Microsoft when it comes public but it goes up 100-fold in the next 20 years.
But that's not the point. The point is it's much more difficult to pick a Microsoft and sort it out from the 99 other stocks that go to zero in the same business than it is to say that McCormick, a big spice company, that we think has a wide economic mode and good growth prospects going forward, it's going to be much like it is five years from now, just more profitable, paying larger dividends. Hopefully the stock price goes up as well. I'd take that. I think it's more attainable, it's more reasonable, I can sleep at night.
Glaser: Some good points to consider. Thanks for talking with me, Josh.
Peters: Very happy to be here.
Glaser: For Morningstar.com, I'm Jeremy Glaser.