Your Retirement Can’t Wait for the Next Crash


I don’t know about you, but I have the feeling the market is beating new highs every week or so this year. This leads me toward many articles explaining how the market is way too high right now and the next crash will be happening anytime soon:

Source: multpl

I recently quit my job and was offered to either keep my pension or invest a lump sum in a retirement account. I decided to invest the money myself, you can read here why. If you have money waiting on the sideline or if you have a lump sum amount of money to invest in the upcoming months; you are probably stuck in the same situation I am: I don’t want to invest money for my retirement right before the market crash. But the truth is… even if I’d rather invest my money after a crash than before, time will erase most of the damages at one point.

Market Crashes aren’t that bad

When it comes down to investing, everything is linked to perspectives. If we would treat finance as a science, we would examine a phenomenon closely. Let’s look at the market reaction during the 2008 crisis:

Source: Ycharts

Please note that I’ve used the S&P 500 total return along with 2 dividend ETFs to illustrate that pretty much everything was down during this short period of time. Regardless where an investor would have invested his money at the beginning of 2008, he would feel really terrible once he hit the bottom on March 9th 2009. I know people who sold during the crash and haven’t come back to the market yet. I can appreciate the feeling, but we must continue our scientific approach and put this highly intense phenomenon in perspective. Let’s look at the past decade and see the impact of the 2008 market crash:

Source: Ycharts

Do you see it? I mean, the long term impact of the worst crash in the stock market history? Because I don’t.  Even the baddest lucked investor would have recuperated his money within three years if he had invested the day before everything went south. Then, the rest is history.

Now that I have determined that the worst market crash had no impact on your retirement, what are you waiting for? Because this is really the problem of sitting on the side line with money in your bank account:

  • what happens if the market keeps going up in 2017 and starts strong in 2018? You wait?
  • what happens if the market goes down by 10% and stagnates, you go in?
  • what happens if the market goes down by 15%, goes back up by 5% and then goes back down by 10% again, is the right time to invest after that?

The more you try answering these kinds of questions, the more confused you will get about it. Eventually, you will suffer from paralysis by analysis… and you will be making another bull market.

Dividend Growth Above All

Nobody feels good about investing in an all-time market high and thinking it will eventually drop. For this reason, I’ve decided to invest all my money in dividend growing stocks. Why? Because if I invest in the worst timing ever, I will still get paid while my portfolio recovers; even better, by choosing among strong dividend growers, I will benefit from the power of dividend growth compounding. Here’s a short list of dividend payers that kept increasing their distribution during the latest recession:

Source: Ycharts

I’ve picked those companies from y portfolios, but I could have picked over 100 companies showing a similar graph. What you see there is basically that many companies have more than doubled their dividend payment over the past decade. This should be enough to invite you to select dividend growers today instead of waiting on the side line. Do you see all the growth you have missed if you waited for the next crash to hit?

How to Pick the Right Dividend Growers

I like to compare the current market to a big wave that lifted up everything from the bottom of the ocean. Both the good and the bad are on the top of the surface and chances of picking up garbage have increased significantly. While I believe the best timing to invest is always today and the worst tomorrow, it doesn’t mean I should go and pick-up any trendy shares.

As a starting point, I decided to pick companies that are part of the Dividend Achievers list. The Dividend Achievers Index refers to all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time of writing this article, there were 265 companies that achieved this milestone. You can get the complete list of Dividend Achievers with comprehensive metrics here.

This gives me a great start-up as I know these companies have been increasing their payouts during the latest recession. Then, I will dig deeper and narrow down the number of companies to about 50. Going from the previous list of 265 to 50 is surprisingly easy.

The above mentioned list comes with a long list of metrics that will help you making additional filters:

  • Dividend Yield
  • 5yr Dividend Growth
  • 5yr Revenue Growth
  • 5yr EPS Growth
  • Payout Ratio
  • Cash Payout Ratio
  • PE

I filter my list using the following criterion:

  • dividend yield over 1.50%
  • 5 year dividend growth over 5%
  • 5 year revenue and EPS growth positive
  • Both payout ratios under 100%

The purpose is not to make an exclusive list and not pick any companies outside of it, but it’s a good start to build the foundation of my portfolio. After pulling out these filters, I was down to 49 companies. There are some very interesting candidates from this selection. I could have reviewed the whole 49 but I will limit myself to a few of them with their investment thesis.

Clorox (CLX) 2.49% yield, 6.96% annualized growth (5yr)

Investing in leaders is one of the basic rules if you want to protect your portfolio against any bear markets. CLX has demonstrated a strong branding giving a vast client base and opportunities to charge a premium on its products.

Lockheed Martin (LMT) 2.46% yield, 15.81% annualized growth (5yr)

Lockheed Martin is the world’s largest defense contractor earning 61% of its sales from the US Department of Defense, 21% from other US government agencies and 18% from international clients. Heavy regulation, years of symbiosis with the US Defense and their know-how are three key elements protecting most of LMT’s business.

Johnson & Johnson (JNJ) 2.53% yield, 6.96% annualized growth (5yr)

I often refer to JNJ as the mother of all dividend stocks. This is the kind of company that has been built for decades with the shareholder in mind. JNJ is one of the rare companies to be part of the elite group of Dividend Kings, with over 50 consecutive years of having a dividend increase. JNJ has been able to achieve such milestones due to its impressive diversification strategy including both product and geographic diversification.

Hormel Foods (HRL) 2.00% yield, 17.86% annualized growth (5yr)

HRL doesn’t only sell packaged foods, but innovates with new products and acquires other segments for the sake of diversification. The company has identified specific niche where it builds or acquires popular brands. As America is slowly shifting toward healthier food, the acquisition of Applegate Foods and Muscle Milk will help HRL to benefit from this opportunity.

3M Co (MMM) 2.27% yield, 15.08% annualized growth (5yr)

3M’s competitive advantages are legendary. Industrial clients are reluctant to abandon such a world class company for any competitors as they know MMM will deliver quality products. Consumers continue to buy post-its again and again as the product is well designed, well known and, most importantly, works perfectly. 3M shows one of the strongest business models among the Dividend Kings and its dividend growth potential will continue to be one of its most interesting characteristics for investors.

Final Thoughts

As you can see, I did not focus on dividend yield, but rather on dividend growth for my examples. This is because companies with strong dividend growth numbers must have the other fundamentals to back it up. In other words; if management can pull out high single-digit to double-digit growth, it’s because they know they can continue to grow. Obviously further investigation will be required before pulling the trigger on any of these stocks. Still, a good part of the work has been done already and I’m confident in building a retirement account that will make me smile in 30 years.

Disclaimer: I do hold  CLX, LMT, JNJ, HRL, MMM in my DividendStocksRock portfolios.

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