US Isolationism and Your Investments
The South China Morning Post reported the signing of the Regional Comprehensive Economic Partnership that includes China and most of its Asian neighbors. This deal includes Japan, Australia, New Zealand, and South Korea but not the USA. The new trade deal will lower tariffs and aims to increase regional trade with less red tape. Post-pandemic growth is expected to benefit in the region. Not only is the USA not part of this deal but it is also not part of the Transpacific Partnership which the Obama administration helped develop and Trump pulled out of. Here are some thoughts about US isolationism and your investments.
Protectionism and Your Investments
Protectionism, according to Investopedia, is when a government restricts international trade. The goal of protectionism is typically to stimulate economic activity in the county. However, it can also be instituted for reasons of safety, quality, and geopolitical concerns. As with the trade war started by Donald Trump, tariffs and import quotas are common tools. The infamous Smoot-Hawley Tariff Act in the 1930s was meant to protect US industry but initiated a trade war that was partly responsible for the depth and length of the Great Depression. Protectionism is often driven by a desire for isolationism. A country and its people feel threatened by foreign competition. The Trump trade war played on a belief that foreigners were taking advantage of the USA and that the USA had to close its borders to trade or hike up tariffs to protect itself. The result so far appears to be an exclusion of the USA from two important markets at a time when China and other Asian markets are expanding. How should you invest when US companies will find it more difficult to compete in a third of the economies of the world?
Investing from an Isolated Country
If you want to invest where there is more economic activity, you may need to invest abroad instead of in the USA. This means investing in foreign stocks. But, if laws like the Kennedy Act take hold, investing in China will be more and more difficult. The targeted decoupling from China will become a greater and greater issue going forward. However, you can invest in companies that do business in other nations in the Asian Pacific. These companies will likely benefit from trade deals from which the USA is currently excluded. ETF Trends writes about investments from abroad. As they note, the USA is about 25% of the world market and that percentage may well decline as other economies advance and the US stagnates in isolationism. Luckily, you do not need to speak a foreign language or deal with a stock broker in a foreign country in order to invest in foreign markets. You can choose investment funds that track offshore investments and you can purchase ADRs (American Depositary Receipts) of foreign stocks listed in US stock exchanges.
A good resource for checking out ADRs is the website TopForeignStocks.com. The ADR listings are grouped according to economic region and then by country. US News has a nice listing of ETFs with an international focus, low costs, diversified, and meant for safe long term investing.
US Isolationism and Your Investments – Slideshare Version
Covid-19 Pandemic and Surge in ESG Investing
Many expected ESG investing to take a dive due to the economic stresses of the Covid-19 pandemic but there has been a surge of ESG investing instead. It appears that long term investors realized that the best-run companies were the most likely to endure and prosper during these difficult times. And, the stresses of the pandemic have also reinforced concerns about how we deal with our planet and each other.
Covid-19 Pandemic and Surge in ESG Investing
Financial News published an insightful piece in regard to the Covid-19 pandemic and surge in ESG investing. As they note, the strongest focus has been on the “S” in ESG in that human capital management and labor standards. Well-run companies with a focus on sustainability are the most likely to survive and prosper.
The trend of Environmental, Social and Governance investing, or ESG, has been gaining momentum for years as climate change and other social ills threaten to alter the capitalist landscape. Then the virus struck. Many assumed the ESG focus would fade. But early on in the crisis, major shareholders urged company bosses to focus on employee well-being and on ensuring that suppliers were paid during global lockdowns, even if this meant cutting or suspending dividend payments.
This attention to how a company acts going forward is likely to continue to focus on governance and sustainability as well as environmental concerns according to JPMorgan Asset Management. They state, according to Financial News, that nearly three-fourths of their investors believed that the Covid-19 crisis will lead to more concerns about issues like biodiversity losses and climate change. It would seem that the pandemic has made us realize that the natural world has a huge say in how human life and investments play out!
The number of investment funds focusing on ESG investing has multiplied and these funds are making it clear to companies that they will put their investments with those who emphasize an ESG focus more than a focus on short term profits.
Demand for ESG Investments Increases Due to the Covid-19 Pandemic
Morningstar also notes that investors are demanding ESG investments during the pandemic and for afterward. Investment trusts and ETFs are maintaining an active focus on the companies they are invested in and active stewardship as well. Thus they meet with corporate boards to review ESG issues. The first issues right now have to do with employee health, safety, and retention. But, supply chain issues are of great concern both for company viability but also concerns about forced labor, employee mistreatment, and dealings with military and spy services as with China. While the US government is moving toward decoupling from China for national security reasons, ESG investors are concerned about company viability and the effects of the work force.
With the increasing focus on the safety of our natural world, ESG investing is looking to the long term with investments in socially and environmentally responsible projects that will help us avoid Covid-19-like disasters in the future.
Covid-19 Pandemic and Surge in ESG Investing – Slideshare Version
Decoupling of Investment in China
As the Covid-19 pandemic began, the USA had to go begging China to send protective masks made in China (by 3M). American had become dependent on a global supply chain to the extent that it had become a risk to national security. This situation had been decades in the making and the USA and other nations are taking actions. Decoupling of investment in China is a major part of this movement.
Decoupling of Investment in China
Although the decoupling of investment in China hit the general news as the pandemic was playing out, it has been on the minds of many for quite some time. In January of 2020 The Harvard Business Review wrote about how the USA and China will decouple.
While Covid-19 has dominated news for much of the year – and understandably so, as people and businesses fight for their survival – a larger, longer-lasting problem has been unfolding in the background, which many businesses will soon need to contend with: As de-globalization accelerates, two hostile economic blocs are emerging, one centered around China and the other around the United States.
Arguably, we’ve been headed towards this moment for a long while. De-globalization has been under way for more than a decade: At best, international trade was stagnating before the pandemic hit, and foreign direct investment had fallen by 70 percent in 2018 from its peak in 2007. Never easy, Sino-U.S. relations have taken a more confrontational turn under Xi Jinping. By 2018 we were already witnessing the opening skirmishes of a new Cold War.
We wrote about the Kennedy Act and investing in China a few months ago. In that article we noted how China has been using US investment capital to build up its high tech sector and how that sector often works hand in hand with Chinese intelligence operations and its military. The USA and other nations have been helping fund the rise of a nation bent on dominating Asia and then the world. We cannot stop them from having such ambitions but the USA, Europe, and others do not have to fund those efforts.
How Will Decoupling from China Affect Your Investments?
In the Harvard Business Review article they suggest several measures for international companies to take.
Reduce Business Presence in Hong Kong
Relocate Supply Chains to Politically Safer Countries
Reassess relationships with Chinese businesses and universities
Consider the geopolitical risks and reposition accordingly
As a US investor, you may be barred from certain investments in China and the number of prohibited investments may increase over time. Your decoupling of investment in China should be led by the degree of involvement of that investment with Chinese military or intelligence operations.
Direct US Actions to Decouple from China
The New York Times reports that investment in companies with military ties has now been barred by presidential action in the waning days of the Trump administration. Specifically, this means investments in Huawei, China Mobile and China Telecom. The list includes 31 companies including China Mobile Communications Group, China Telecommunications Corporation, Huawei, Sinochem Group, Hangzhou Hikvision Digital Technology, China Railway Construction Corporation, Inspur Group and Aviation Industry Corporation of China.
The order takes effect on January 11, 2021 and if you have investments in any of these companies or funds that invest in them, you have until November 11, 2021 to divest yourself of those assets. It is of note that China Telecom fell $4 a share from $36 to $32 on the news. However, the stock is now selling for what it has been worth for most of the year during the Covid-19 pandemic and resulting economic slump. This was a long time coming and is not likely to be reversed by the Biden administration. As such, investors need to get out of the specific investments on the list and consider what else might be pulled into the decoupling of the USA and China as a new cold war begins.
Decoupling of Investment in China – Slideshare Version
Decoupling of Investment in China – DOC
Renewable Energy Investments
The election of Joe Biden bodes well for renewable energy investments as the President-Elect calls climate change the greatest threat facing the human race. How can investors position themselves to take advantage of the coming emphasis on green energy? Is a focus on ESG investing sufficient or should you drill down and find specific investment opportunities? Here are a few thoughts on renewable energy investment in the Joe Biden presidency.
Alternative Energy Investments
Investopedia published a useful article about alternative energy stocks for late 2020.
The alternative energy sector is comprised of companies that engage in the generation, distribution, and sale of renewable and clean energy, as well as related products and services. Examples of alternative energy sources include solar, wind, hydroelectric, and geothermal.
They cite a few examples of promising renewable energy investments.
The growing list of names in the sector includes companies like Israel-based SolarEdge Technologies Inc. (SEDG), Brazil-based Companhia Energetica de Minas Gerais CEMIG (CIG), and First Solar Inc. (FSLR).
And, they note that you can buy shares of ETFs that track renewable energy investments as well.
Alternative energy stocks, as represented by the iShares Global Clean Energy ETF (ICLN), have dramatically outperformed the broader market, posting a total return of 47.4% compared to the Russell 1000’s total return of 12.6% over the past 12 months.
Even before Biden won the 2020 presidential election, this sector has done well. We expect that with a green energy-friendly president in the White House that the sector will do even better in the coming years.
Renewable Energy Investment Opportunities
US News provides us with their list of the seven best renewable energy stocks and ETFs. Their list includes the following:
Invesco Solar ETF
iShares Global Clean Energy ETF
NextEra Energy (NEE)
Vestas Wind Systems (VWDRY)
Brookfield Renewable Partners (BEP)
Iberdrola (IBDRY)
ALPS Clean Energy ETF (ACES)
This list of investment opportunities in the renewable energy sector gives investors the opportunity to invest in green energy and make money. The sector did well this last year during the Trump administration but is likely to thrive under Biden.
Mixing and Matching Energy Investments
As the climate warms up, the world will transition to renewable energy, reduced carbon emissions, and energy conservation. However, oil and natural gas are not going away in a hurry. We wrote recently about Exxon as an investment. The smartest energy investors may well be the ones who hedge their bets by maintaining positions in the traditional oil and natural gas sector while adding targeted renewable energy investments for the future.
The geopolitical benefit of US energy independence is huge. As such, even a green Biden administration is unlikely to undercut the ability of the nation to extract petroleum products and avoid going back to dependence on oil from the Middle East. And, as the Covid-19 pandemic is brought under control, the world economy will improve. Energy requirements will go up. And, all well-managed energy companies are likely to see the benefit, not just renewable energy investments.
Renewable Energy Investments – Slideshare Version
Renewable Energy Investments – DOC
Renewable Energy Investments – PDF
Covid-19 Vaccine Market Rally
Pfizer’s vaccine for Covid-19 is more than 90% effective in preventing the disease and markets everywhere have rallied. So far the Dow has out-performed the tech-heavy NASDAQ. Travel-related companies and airlines especially have rallied. Aircraft maker Boeing and industrial powerhouses like General Electric have also jumped up in price. How can you best profit from the Covid-19 market rally?
Best Ways to Profit from a Covid-19 Vaccine Market Rally
As we have previously noted, a Covid-19 vaccine will not necessarily be a profitable investment for the long term. For example, Pfizer’s stock jumped up $2 a share from $37 to $39 on the news of their successful vaccine. However, the company has a market cap of $219 billion and a huge list of pharmaceuticals that they produce. If the Covid-19 vaccine turns into a yearly need, Pfizer may add a dollar or two a share to its stock price but much more.
However, the stocks that have been hit the worst by the pandemic are travel-related air travel which has virtually shut down and running a hospitality business is not very profitable when social distancing is a necessity. These are the stocks that are rallying now and likely to continue to rally as widespread vaccination brings the pandemic under control.
While tech stocks have done well with the move to working at home and forced isolation, stocks connected to the general economy have suffered. The increase in stock prices for companies like GE indicates how a general economic recovery coupled with a reduction in Covid-19 cases will fuel general economic growth.
Market Timing of a Covid-19 Market Rally
Shares everywhere rose on the news of a successful vaccine for Covid-19. However, they also fell back partials just as fast. The CEO of Pfizer has said that the company may be able to produce as many as 150,000,000 doses of the vaccine before the end of the year. They anticipate turning out 1,300,000,000 doses in 2021. This is a two-shot vaccination so they should be able to vaccinate 75,000,000 people this year and 650,000,000 next year. While this is good news, the goal is herd immunity. That will require the vaccination of about 200,000,000 people (400,000,000 doses) in the USA and the vaccination of about 5,000,000,000 worldwide with 10,000,000,000 doses world-wide.
What we can expect is a rally on the news of this and other vaccines followed by a fall back. This will be followed, again, by a slow market recovery as the effects of vaccination are felt across the economy.
What about Vaccination Hesitancy?
As many as half of the people in the USA have said they may not want to get a vaccination for Covid-19 as they distrust vaccines. This does not bode well for a long term Covid-19 market rally as the point is to reduce Covid-19 cases and get the economy back to work. With a successful vaccination campaign by Pfizer and others, the best case scenario is herd immunity and a recovering economy by the end of 2021. If half of the population foregoes vaccination, we may be looking at a couple of years more before things return to normal.
As such, the news about Pfizer’s vaccine is excellent but hopes for economic recovery may be a bit premature. Successful investing in a Covid-19 vaccine market rally and recovery may take a bit of patience.
Covid-19 Vaccine Market Rally – Slideshare Version
Is an Alzheimer’s Drug a Good Investment?
The Alzheimer’s drug, aducanumab, has been given a new lease on life after a phase III trial was previously halted. Unlike other treatments for Alzheimer’s disease, aducanumab has the potential to halt the progression of the disease instead of just treating symptoms. The drug was discovered by Neurimmune and is licensed by Biogen Inc. The medical significance if this drug passes all trials and becomes available for treatment is great. But, is an Alzheimer’s drug a good investment?
Aducanumab
Aducanumab is a human monoclonal antibody. Unlike antibodies that the body produces to fight infections, aducanumab targets beta-amyloid which is the material that is found in the brains of patients with Alzheimer’s disease. The plaques are toxic to nerve cells in the brain. The rationale for aducanumab is that it can stop the buildup of beta-amyloid and therefore the progression of Alzheimer’s. The drug had progressed to a stage III FDA trial. This means that it had been demonstrated not to cause any bad side effects and that it helped in animal studies. In stage III the goal is to prove that it has a statistically significant effect on the progression of Alzheimer’s disease.
Likely FDA Aducanumab Approval
Stage III testing of this drug was halted in March of 2019 when it was believed that it would not meet expectations and fail testing. However, re-evaluation of the study results showed that it might work after all. Thus phase III trials have been resumed. So far studies show that patients taking a high dose of this drug have a 23% reduction in their rate of decline from Alzheimer’s disease. Now the FDA has indicated that the drug is safe and effective which will clear the way for its FDA approval as a treatment for Alzheimer’s.
Current Alzheimer’s Drug Treatments
The Mayo Clinic website lists four drugs currently available to manage symptoms of Alzheimer’s. Three cholinesterase inhibitors that help symptoms in mild to moderate disease are Donepezil (Aricept), Galantamine (Razadyne) and Rivastigmine (Exelon). These drugs help until the reduction in viable brain tissue reduces the amount of cholinesterase to inhibit. The other drug which is used on more severe stages of the disease is Memantine (Namenda). This drug also helps symptoms but does nothing to slow the progression of or cure the disease.
Increasing Incidence of Alzheimer’s Disease
The number of Americans currently with Alzheimer’s is 5.8 million.
Millions of Americans have Alzheimer’s or other dementias. As the size and proportion of the U.S. population age 65 and older continue to increase, the number of Americans with Alzheimer’s or other dementias will grow. This number will escalate rapidly in coming years, as the population of Americans age 65 and older is projected to grow from 55 million in 2019 to 88 million by 2050.
The current incidence of Alzheimer’s in people aged 65 and older is 10%. As the number of people in the older age group increases so will the number of people suffering from Alzheimer’s. Treatment of Alzheimer’s will be for the rest of the person’s life and so long as the medication helps. Thus treatment with aducanumab could be for decades. This would be a significant income stream for a company like Biogen.
Biogen
Biogen is an American multinational biotech company that currently trades for $324 a share on NASDAQ. Its primary focus is treatments for neurological diseases but the company has many other types of drugs. Their current list of drugs includes treatments for multiple sclerosis, chronic lymphocytic leukemia, spinal muscular atrophy, psoriasis, hemophilia A, and hemophilia B. Drugs in development by Biogen include treatments for acute optic neurites, lupus nephritis, idiopathic pulmonary fibrosis, neuropathic pain, and amyotrophic lateral sclerosis (Lou Gehrig’s Disease) along with aducanumab.
Biogen stock has had a very bumpy ride over the last seven years as investors have alternately loved and hated the stock due to the success or failure of its drugs in clinical trials. While it currently sells for $330 a share the price has been as high as $380 a share in 2015 and as low as $234 a share in 2019. Investors who got in by 2000 saw the stock go from $40 a share to its current price. The stock has a P/E ratio of 10.98, does not pay a dividend, and would see a nice addition to its income stream if aducanumab becomes a mainstay for Alzheimer’s treatment.
However, their Alzheimer’s drug will only be part of their product line, albeit a profitable one for a long, long time.
Is an Alzheimer’s Drug a Good Investment? – Slideshare Version
Post-election Stock Market Rally
What are the chances of a significant post-election stock market rally? A Biden victory coupled with Democratic control of the senate will stimulate the economy but will it stimulate the market? The stock market has gone up 650 points to start Election Day and futures indicate a likely rally post-election according to Investor’s Business Daily.
Dow Jones futures and S&P 500 futures jumped early Tuesday, while Nasdaq futures rose modestly. With a market correction in force, a new stock market rally attempt is underway with Election 2020 finally here, with the latest IBD/TIPP Trump vs. Biden poll showing a tighter race.
There are two pieces to the issue of who will be governing the country over the next years. Biden appears to have the edge over Trump but that will not be certain until all votes are counted and all court challenges have been dealt with. A more likely case is that Democrats will probably gain control of the US Senate by a few votes. This by itself could lead to stimulus payments before the start of the next year and would be a boost for both the economy and the markets.
Investing Government Spending on Infrastructure
We have written about the sorry state of US infrastructure and how infrastructure spending on everything from roads and bridges to 5 G will drive the US economy. Interest rates are extremely low and likely to remain so for years. Thus, any government borrowing will be subject to low interest rates. A Democratic Congress along with a Democratic President will likely invest in a Made in America program focusing on infrastructure, green energy, bringing more manufacturing back to the USA, and driving consumer spending higher.
The shape of the economic recovery has been starting to look like an “L” or really wide “U” instead of the hoped for “V”. We could be looking at a recession that lasts for years, like the Great Depression, if a stimulus does not happen. A new administration with the same party in control of Congress will likely spend without concern for the budget until they get the economy moving and healthy again. This would provide a stimulus similar to WWII spending that forklifted the US economy out of the Great Depression.
Investing in a Post-election Stock Market Rally
If there is a strong post-election stock market rally, which sectors will benefit the most? If stimulus checks resume it will put money in consumers’ hands at the base of the economy and the result will a surge of spending on consumer goods. When infrastructure spending starts it will benefit construction and materials suppliers as well as the general economy because there will be more jobs. For many years the big tech stocks have been the best bet but that will no longer be the case. As such, the FAANG stocks may not fall but they may cool off. If we see a positive economic result from infrastructure spending, it will be repeated. That bodes well for long term investors in the sectors that will benefit.
Post-election Stock Market Rally – Slideshare Version
Doji Candlestick Trading
The Doji is one of the dozen major Japanese Candlestick trading signals. It describes a trading session that opens and closes at virtually equal prices. It is a reliable indicator of market uncertainty but does not tell you the direction that the market is going next. Depending on how high the market goes or how low it falls before returning to the opening price, it can be described as a Gravestone Doji, Long legged Doji, or Dragon Fly Doji. These describe sessions with a run above the open, equal high and low prices, and a market that falls impressively before its return to the base price.
Different Types of Doji
In addition to the Gravestone, Long Legged, and Dragon Fly Doji signals there are several different types of Doji and each renders a different description of market movement and information about where the market might be going next. The Bearish Evening Doji Star, Bullish Morning Doji Star pattern, and Cross Doji are just a few of these. In each case the Doji tells us that the market is conflicted with both up and down forces at work. However, the extended Doji patterns give us a bit more information about what to expect next.
2 Doji Pattern
The 2 Doji pattern is exactly what it sounds like. The market produces two Doji signals back to back. This indicates continuing market uncertainty and is an even stronger indication that the market is about to move. At this point in Doji candle trading, traders wait for the next Candlestick signal to guide their actions. The breakout can be significant after this signal but many traders not only wait for the next Candlestick signals but confirming market action as well before trading into a rising, or falling, market.
Bearish Evening Doji Star
This is a three part Candlestick signal. The middle signal is the Doji. It is preceded by an up day (white candle) and followed by a down day (black candle). This is a bearish indicator. The specifics include the body of the Doji being above the previous day’s body but the limit of the Doji falls below at least the high price of the previous day. The following signal has its candle body below that of the Doji and the closing price below the midpoint of the first candle in the pattern. The Doji still indicates market indecision. The complete three-part signal is an extremely bearish indicator.
Bullish Morning Doji Star Pattern
The bullish Morning Doji Star pattern has three parts. It starts with a down day (black candle) that indicates a substantial drop in price (long black candle). The Doji signal is the second in this set and gaps below the first signal. The third signal in this pattern closes within the body of the first candle. It is a strong bullish indicator showing negative sentiment on the first day, indecision on the second, and bullish sentiment on the third. As with many bullish indicators, smart Candlestick traders typically look for a confirming upward move before going “all in” on what will probably be a substantial rally.
Candlestick Doji Star
This two-part Candlestick is a bullish reversal signal. The Candlestick Doji Star starts with a downward day (black candle) followed by a Doji candlestick whose body lies well below the body of the first candlestick. The pattern occurs after a definite downward trend. This signal indicates that traders are rethinking the downward trend and wondering if a market bottom has been reached. Candlestick traders will ready themselves for upward movement at this point but wait for confirming movement before risking all of their trading capital.
Cross Doji
This signal is also called the Harami Cross Doji. The signal is an indication of a possible trend reversal and occurs at the end of both downward and upward trends. With a downward trend there is a substantial down day shown by a long black candlestick. The Doji in the following session occurs midpoint on the black candlestick showing that the market recovered partially from the low of the previous day and then remained undecided. When the signal occurs at the end of an upward trend, we see a substantial up day followed by a mid-point Doji.
Doji Candle Screener
Candlestick trading is popular because it is accurate and because the visual signals are easy to read. Nevertheless, the more-complicated Candlestick signals might be easy to miss as well and if you are following several stocks, the problem is multiplied by the number you are following. A good answer to this issue is to use a screening tool. A Doji Candle screener will alert you to moments of indecision in the market and give you the opportunity to take advantage of potential market reversals.
Doji Candlestick Trading – Slideshare Version
Is Exxon a Good Investment?
As the investing world has transitioned to more and more ESG investing, oil companies like Exxon have fallen out of favor with many. Is Exxon a good investment? After years as the leading oil company and a cash cow, Exxon’s revenue has fallen by a half and it was removed from the Dow Jones Industrial Average. It is planning to cut jobs and investments but is retaining its 8.7% annual stock dividend.
Investor’s Business Daily looks at Exxon and sees problems. They say the stock is not a buy at this time. On the other hand, Oil Price notes that oil demand is coming back a bit and will come back a lot more as the pandemic subsides. While other majors are backing out of oil and natural gas it will leave more room for Exxon. While the world switches to electric vehicles and solar power, there will still be a need for oil and natural gas far into the future. Although they do not see stellar growth, they believe that Exxon will not go away and will provide a healthy dividend for investors far into the future with its bet on oil.
Exxon as an Investment
If you had invested in Exxon in the 1980s, your shares today would be worth ten times what you purchased them for. Of course, if you had sold in June of 2014, before oil prices fell, your shares would have been worth thirty times as much as the 1980s price. During those years you would also have been receiving a dividend with a three to five percent yield. Today you would still be getting the same dividend although the yield is over ten percent as the stock price has fallen. Today Exxon trades for $34 a share. In regard to dividends, Exxon is one of the handful of companies that have paid dividends for more than a century and have either raised their dividend or kept it steady for nearly forty years.
Investing in Exxon for the Future
Exxon is developing newly discovered oil fields offshore from Guyana on the Northeastern coast of South America. The total recoverable oil reserves in the area come to 8 billion barrels. Exxon is still exploring as it is developing sixteen individual sites. By comparison the Prudhoe Bay oil field in Alaska originally had 25 billion barrels. Exxon is also a leader in extracting oil from shale deposits using fracking technology and plans to increase production in the Permian Basin in the coming years.
Despite the pandemic, increased green energy production, and greater fuel efficiency, world energy demand will continue to grow.
In the near term, the pandemic and its economic effects will continue to depress demand of natural gas and oil for a year or more. But, as economies get back on track, demand will pick up and continue to grow for decades. During that time Exxon will find its revenues increasing which will drive profits and its stock price higher. Investors in Exxon will want to take the long view in terms of decades. Meanwhile, enjoy the dividend.
Is Exxon a Good Investment? – Slideshare version
Dividend Stock vs Growth Stock
Dividend stocks are stocks that pay you a share of company profits, usually every quarter. They are generally mature companies but not ones with a lot of growth potential. Growth stocks are newer and have a better chance of expanding rapidly and paying you for the risk of investing in a new company. However, dividend stocks can grow as well and growth stocks tend to offer dividends as the companies mature. Investors who do not want to pay taxes on their investments often choose growth stocks while retirees who need income commonly choose dividend stocks.
Tradeoff Between Dividends and Growth
Investors who focus on growth stocks are looking for companies that will grow rapidly. Investors who focus on dividend stocks are looking for security and cash flow. Growth stock investors accept risk in return for growth potential and dividend investors accept a slow rate of growth in return for income and safe investments. Young investors generally focus on growth and pivot to security and dividends as they approach retirement. While you are in your earning years, you generally do not want to be paying taxes on dividends but when you are retired and in a low tax bracket, the taxes are not so painful.
Best US Dividend Growth Stocks
You do not need to necessarily choose between dividends and growth. A good example is Apple, which resumed paying dividends in 2012 and has increased its dividends yearly ever since. At its peak in 2012, Apple traded for $25 a share. Today it trades for $117 a share. The stock split 7 for 1 in 2014 and 4 for 1 in August of 2020. Another choice is Home Depot which has paid dividends for thirty years, has a 2.3 dividend yield, and has grown from a $27 stock in 2010 to a $283 stock today.
Buying Protection With a Dividend Growth Strategy
When looking for dividend stocks, look for companies that have increased their dividends over the years. This tells you that the company is growing and is rewarding investors who stay the course. Dividend companies that increase their dividends over the years are making money, covering expenses, growing, and have healthy cash flow. This is a somewhat backward look at intrinsic stock value. These companies have strong product and service lines, manage their businesses well, and are likely to continue to grow and increase dividends for years to come.
Countering Slow Dividend Growth
When dividend growth is slow in your portfolio it is often slow across most dividend-paying stocks. If, like many investors, you are invested in a fund that tracks the S&P you might consider switching to a dividend-focused ETF such as iShares Select Dividend, SPDR S&P Dividend, or Wisdom Tree Total Dividend. If you are comfortable with choosing individual investments, consider the likes of Home Depot or Apple for their growth plus dividends. Alternatively, young investors who don’t rely that much on dividend income may simply choose to focus on pure growth stocks and forget the dividends.
Deep Value Dividend Growth Portfolio
Dividend growth stocks not only provide a quarterly dividend but tend to increase that dividend year by year. And, more importantly, they tend to outperform the market as a whole. Add to this the fact that such companies tend to be very secure investments. Seeking Alpha suggests a deep value dividend growth portfolio and provides specific investing options. Recent additions are UNH, MSM, and UPS. Their collection of stocks in this portfolio has been outperforming the S&P 500 by about 6% in the short term and is likely to continue this over the longer term.
Difference Between Direct Growth and Direct Dividend
Mutual funds offer various options in regard to dividends and growth. A direct growth plan focuses on growth stocks and cuts out the middle man so that your expenses are less. However, you will need to do all of the documentation that would otherwise be done by the mutual fund. In the case of a direct dividend plan you also cut out expenses compared to a regular plan but also need to complete all of the documentation required. In both cases you will decide whether or not to invest dividends and how to deal with things like mergers and takeovers.
Mutual Fund Growth vs Dividend Plan
In a mutual fund, you invest your money and choose an option. Then the fund follows your instructions in regard to the investments. When you choose a growth plan, they pick stocks with growth potential and if these include dividend stocks, the dividends are reinvested. But, if you choose a dividend plan, they will pick all dividend stocks and pay you dividends on a quarterly basis. If dividends are reinvested or if they are paid out, you will owe taxes on the dividends. In general, younger investors will go with growth plans and those nearing or in retirement will choose a dividend plan.
Dividend Stock vs Growth Stock – Slideshare version