Be Greedy When Others Are Fearful
This past Wednesday marked the one-year anniversary of the real-money Inflation-Protected Income Growth portfolio. The year-in-review article that celebrated that portfolio's first successful year omitted one company whose stock is in that portfolio, pipeline giant Kinder Morgan . That stock was left out of the review for a very good reason: On Wednesday, Kinder Morgan's stock fell on disappointing guidance, and that drop provided me too good an opportunity to pass up.
On the drop, I bought shares in my wife's IRA, paying $33.16 per share (plus commissions). By buying, the Fool's disclosure rules meant I couldn't mention the stock until now. At that price, Kinder Morgan's anticipated $1.72 dividend over the next year hands her IRA a nearly 5.2% yield. In addition, the prospects for continued dividend growth that made the company a worthy IPIG portfolio pick are still fundamentally in place, although the growth may not be as quick as previously anticipated.
What made it time to buy?
Kinder Morgan doesn't often go on sale in the market. In fact, almost immediately after it was originally selected for the IPIG portfolio, its shares leaped past my buy-below price. Indeed, it almost got away from the portfolio because its shares quickly became too pricy to buy. Only a subsequent correction knocked the company's shares down to where they became reasonable to buy.
This past Wednesday, while the shares were down on the news, a quick valuation estimate suggested that Kinder Morgan still looked to be worth somewhere in the neighborhood of $36 per share. The 2014 dividend, while lower than initially expected, is still anticipated to be higher than the 2013 dividend was at this time last year, which helps buffer the drops from the lower expected growth rates. A market price around $33 with a valuation around $36 on Kinder Morgan was a deal too good to pass up.
Do as Buffett says
As master investor Warren Buffett has said, "[T]ry to be fearful when others are greedy and greedy when others are fearful." While the IPIG portfolio is willing to buy companies trading at up to a reasonable estimate of their fair values, it's also willing to pay less than that estimate, should the market offer such an opportunity. A valuation discipline helped the IPIG portfolio not overpay for Kinder Morgan when the shares were at risk of getting away, and it helped it buy other companies at decent discounts.
Perhaps the clearest case of the IPIG portfolio's picking up a discount by being greedy and buying when others were fearful came from defense contractor Raytheon . Raytheon was selected when the defense sequester spooked investors out of its shares. Raython's stock fell so far that, even if the worst of what was expected from the sequester happened, the stock still looked reasonably priced. When reality turned out better than fears, Raytheon shares took off -- and the IPIG portfolio benefited.
Similarly, the IPIG portfolio picked up shares of pharmacy retailer Walgreen at a relatively bargain price. When selected, Walgreen was finishing up a fight over reimbursements with pharmacy benefits manager Express Scripts that cost Walgreen nearly $4 billion in annual revenue.
The market feared that Walgreen wouldn't get the customers back, but the IPIG portfolio was willing to buy anyway, because Walgreen's stock looked reasonably priced even if those customers stayed away. When Walgreen's business started showing signs of recovery, its stock bounced back -- and the IPIG portfolio benefited
Solid companies at reasonable prices
While the IPIG portfolio will happily take advantage of a bargain if the market chooses to offer it one, the portfolio is primarily focused on owning solid companies purchased at reasonable prices. So long as their dividends look capable of continuing to grow, their balance sheets don't become overleveraged, and their valuations look reasonable, existing IPIG picks can remain in the portfolio. With a collection of stocks that share those key characteristics, the portfolio finished this past week looking like this:
Total Investment (Including Commissions)
Dec. 10, 2012
Dec. 12, 2012
Dec. 13, 2012
Dec. 21, 2012
Mine Safety Appliances
Dec. 21, 2012
Dec. 26, 2012
Dec. 28, 2012
Dec. 31, 2012
Jan. 2, 2013
Jan. 4, 2013
Jan. 7, 2013
Jan. 22, 2013
Jan. 22, 2013
Jan. 24, 2013
Jan. 31, 2013
Feb. 5, 2013
Air Products & Chemicals
Feb. 11, 2013
Feb. 22, 2013
April 3, 2013
May 30, 2013
June 21, 2013
The power of dividends over time
While an individual dividend may seem like a small thing, over time, dividend stocks can make you rich. It's as simple as that. While they don't garner the notability of high-flying growth stocks, they're also less likely to crash and burn. Also, over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine.
With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking 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.
The article Be Greedy When Others Are Fearful originally appeared on Fool.com.Chuck Saletta owns shares of Aflac; Texas Instruments; Microsoft; McDonald's; Genuine Parts; Raytheon; United Technologies; Wells Fargo; Teva Pharmaceutical Industries; Emerson Electric; Becton, Dickinson; Walgreen; Union Pacific; Hasbro; UPS; CSX; J.M. Smucker; Air Products & Chemicals; Mine Safety Appliances; Kinder Morgan; and NV Energy. The Motley Fool recommends Aflac; Becton, Dickinson; Emerson Electric; Express Scripts; Hasbro; Kinder Morgan; McDonald's; Mine Safety Appliances; Teva Pharmaceutical Industries; UPS; and Wells Fargo and owns shares of CSX, Express Scripts, 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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