Double-Digit Returns in a Flat Market
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, November 30, 2011: Issue #1654
Did someone flick the switch?
After several years of up and down economic data, suddenly it feels like the positive data is starting to stick.
According to payroll processor ADP (Nasdaq: ADP), 206,000 new private sector jobs were added in November. And October’s figure was revised upwards to 130,000 from 110,000.
Despite Washington’s desire to pad their own E*Trade accounts rather than do their job and establish some fiscal sanity, things appear to be slowly on the mend.
I know it’s not exactly 1998 when there was a chicken with stock options in every pot, but we’re seeing signs of an economic thaw.
Black Friday numbers were sensational. Americans spent $52.4 billion, up 16 percent from last year, as shoppers stampeded over each other to buy half-priced Xboxes and TVs. About the only negative number to come out of Black Friday was that same store pepper sprays were up 322 percent, beating analysts’ estimates.
The consumer frenzy continued on Cyber Monday as online retailers rang their virtual cash registers to the tune of over $1 billion, an increase of 33 percent from 2010 as of 10 PM Monday.
New Construction
And it’s not just retail that’s seeing an increase in activity. All over South Florida, one of the centers of the housing boom and bust, I’m starting to see new construction taking place.
Anecdotally, families have bought the foreclosed homes in my neighborhood. The tract of land next to my community is being cleared. Both hospitals nearby are undergoing expansions and a third hospital is being built 15 minutes away. And several new retail spaces are under construction, as well.
Across the country, new home sales are up 8.9 percent this year. October’s housing starts were equal to September’s, which had been the highest total all year. An even better sign is that new building permits in October were the highest they’ve been since 2008 and are particularly strong in the south, where unemployment in many states is above the national average.
But in October, 12 states saw meaningful decreases in unemployment. Alabama, Michigan and Minnesota each reported half a percentage point drop in joblessness. Even California – with its too high 11.7 percent unemployment rate – improved by two-tenths of a percent.
Keep Composure…
There’s always a reason to worry. The EU may blow apart, the wrong Presidential candidate may get elected, Kim Kardashian may never find true happiness…
But at Investment U, we recommend investing for the long term and not worrying about market gyrations, pundit opinions and the news. Let the market do what it does best, which is generate positive returns for investors.
Admittedly, not every period is a winner. But if you’re a patient investor who’s thinking in terms of decades rather than months, you’ll be fine.
…With a Sound Dividend Strategy
One of the strategies I advocate is investing in stocks that pay a growing dividend and reinvesting those dividends. Even if the market goes nowhere, that strategy can generate significant returns.
For example, over the past 10 years, the S&P 500 has gone absolutely nowhere. It’s been up big and down big, but after 10 years, it’s right back where it started.
But if you had invested $10,000 10 years ago in a stock with a five-percent yield that grew its dividend 10 percent per year, reinvested those dividends and the stock remained flat the entire time, you’d have $22,000 today for a compounded annual growth rate of eight percent.
In fact, let’s see how a few specific stocks performed over the past 10 years.
Insurance company Mercury General (NYSE: MCY) is a member of The Ultimate Income Letter’s Perpetual Income Portfolio. In 10 years, like the S&P, the stock has remained flat. In 2001, if you invested $10,000 and reinvested the dividends, it would be worth about $15,067 today. Not exactly a fortune, but way better than the return of the S&P 500, and considering the stock is right where it was 10 years ago, that’s not too bad. All of its return came from the dividends. Not to mention that today your original $10,000 would generate $834 per year in income for an 8.3-percent yield on your original cost.
Now, look what happens if we get just a little bit of growth. The stock price of today’s Investment U Plus pick grew an average of 5.5 percent per year over the past decade. Not exactly torrid growth, but considering the return of the S&P 500, that’s not bad. If you bought it 10 years ago, you’d enjoy a 4.4-percent yield at the time.
Today, your $10,000 original investment would be worth over $24,000 for a double-digit average annual return. Because of the power of compounding reinvested dividends, your original 368 shares would now be 570 shares generating $1,105 per year in dividends or an 11-percent yield on your original investment.
There will always be something to worry about. The bears will always have valid arguments about why the market is headed for a plunge. They’ll even be right some of those times. But if you’re investing in quality companies, particularly those that pay solid dividends and you’re able to reinvest those dividends, you almost always come out ahead over the long haul.
Good investing,
Marc Lichtenfeld
Article by Investment U