Question of the Day: What’s been more volatile over these past two months? (see Chart 1) A.) Kentucky Weather B.)
US Stock Market (Sadly for us living in the area, the answer is A.) Kentucky Weather. Although if you follow the
stock market on a daily basis, one might feel its much closer than the statistics show.)
First Bankers Notes Volume 1 Issue 2
A Smoother Ride Question of the Day:
What’s been more volatile over these past two months? (see Chart 1)
A.) Kentucky Weather
B.) US Stock Market
(Sadly for us living in the area, the answer is A.) Kentucky Weather. Although if you follow the stock market on a daily basis, one might feel its much closer than the statistics show.)
Weather aside, it has been an erratic couple of months for the stock market. The S&P 500 has gained or lost over 1% in 25 of 45 trading days since February 1 st . For some perspective, there were only 8 days of 1%+ moves in all of 2017. Positive economic signs throughout the first quarter of 2018 have unfortunately been offset by the current administration’s inclination to play hardball with the United States’ largest global trade partners, leaving equity investors to wonder if President Trump’s posture and recent actions (i.e. tariffs) could ultimately lead to a full-blown trade war. If we’ve been reminded of anything over these last couple of months, or perhaps relearned in this case, it is that stocks are naturally risky assets.
Yet, all stocks are not created equal. Equity portfolios constructed of stocks that reflect an overarching theme can typically exhibit a different risk/return profile than the broad-based equity market. For example, a portfolio consisting primarily of highgrowth technology and biotech stocks should act much differently than one of slow-growth, stable utilities and telecommunications stocks, and both should act much different than the overall market.
Investments 101 taught us that to generate higher returns, one must be willing to accept additional risk in the form of higher expected variability of value, or standard deviation.
However, research done by our team along with academics has shown that companies that initiate and grow their dividend per share have historically generated stronger annual returns with less risk overall (see Chart 2). While this may seem counter-intuitive to investment theory, the fact that these types of companies tend to be the first place investors flock to in times of uncertainty creates a certain relative degree of protection in down markets. Tying this altogether, a portfolio of dividend growers and initiators has the potential to offer highly competitive returns with a much smoother ride over time.
At First Bankers Trust, much of our time and efforts are focused on building equity portfolios of high-quality companies that have demonstrated, and we believe can continue to demonstrate, a sustainable ability to pay a rising dividend to shareholders year in, year out, regardless of the market environment. A portfolio of quality dividend growth companies should enable your wealth to better withstand down markets, meaningfully participate in up markets, and possibly more importantly, provide a steadily growing income stream in all markets.
We look forward to visiting with you over the coming months not only to discuss our investment approach to equity investing, but also how investing in dividend growth companies can fit into your overall asset allocation to help reach your investment goals. As always, if you have any questions related to this article or would like to set up a meeting to discuss your goals and portfolio, feel free to reach out.