How Will Your Investments Do in the Second Half of 2020?

The New York Times asks what is next for stocks after the impressive recovery. Here is what they say about the second half of 2020 and stocks.

Where they go next is a mystery. There’s so much uncertainty about the coronavirus crisis that roughly 40 percent of the S&P 500, about 200 companies, have withdrawn their customary forecasts about how their businesses will perform in the months ahead, according to data from S&P Capital IQ.

This means that investors are working on gut hunches instead of rational thinking about company projections. The concern voiced by The Times is that many folks will be in for a rude shock when earnings reports come out in July. The recent market volatility reflects the tension between worried investors who want to see real numbers and those who are buying on every bit of good news while selling whenever the news is bad.

A popular measure that Warren Buffett attests to is the comparison of the total value of the stock market to the gross national product. The economy is not doing well and it is likely that many companies are making less money than investors would like to see. As more and more people remain out of work and congress drags its feet on more stimulus money, nobody is going to have any money to buy things.

Thriftiness Will Slow Spending

A young woman friend of the family said after the Financial Crisis that most of her friends had started to “sound like grandma” who survived the Great Depression and never quit being thrifty. It is our opinion that this way of thinking will become more pervasive as more and more folks run out of money and cannot find work. The net effect will be that spending will drop across the economy and affect all sectors. Some sectors like travel, dining, and hotels be hit harder and for longer than others but even the tech companies will see reduced sales as their customers start counting their pennies.

The other concern is that the virus is in charge of how things go from here and those economies and countries that deal effectively with the virus will open sooner, remain open, and return to a semblance of normal before a vaccine or medicine emerges to improve the global situation. The USA in not in this category as it cases are skyrocketing while countries in Europe and Asia are maintaining low infection rates and resuming what passes for normal activity in these times.

As the stock market buys on speculation and sells on the news it may well be that when earnings reports come in later in July that the second half of 2020 may turn out to be dismal for your investments and everyone else’s.

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In today’s world of high-speed trading and short attention spans, it might seem unfathomable to hold any given stock for years, let alone decades. But the world’s best investors know all too well the best way to consistently beat the market is to buy high-quality stocks and hold them for extended periods.

To that end, we asked three Motley Fool contributors to each discuss a growth stock they think investors could do well to buy and hold for the next 50 years. Read on to learn why they chose Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), iQiyi (NASDAQ:IQ), and Shopify (NYSE:SHOP).

The rationale for each of these stocks is that they have the potential for significant long term growth. People who invested in American companies like AT&T, General Motors, Coca Cola, or Eastman Kodak early in the 20th century had at least 50 years of growth. These stocks grew with the US economy as phone service was extended to every corner of the land, more and more people had a car or two or three, everyone took photos, and everyone loved to have a Coke. It is useful to note that only Coca Cola has passed into the century relatively unscathed while digital photography essentially killed Kodak, General Motors lost out to foreign competition and passed through bankruptcy, and AT&T was broken up in anti-trust proceedings.

Reasons to Invest in Alphabet Stock

The rationale for investing in Alphabet is that they are using the dominance of the world of internet searches to fund their expansion into multiple, potentially very profitable arenas. Today eight of their products have more than a billion users each. These are Google Play Store, Gmail, YouTube, Android, Chrome, Google Drive, Google Search, and Google Maps. With their restructuring, they are now active in self-driving cars with Waymo, lifespan extension with Loon, drone delivery with Wing, life science products with Verily, and high-speed internet with Fiber. This “multiple bets” approach takes advantage of the huge number of smart people working for Alphabet and positions them for further growth in markets that are not dependent on the original internet search focus. This strategy will, hopefully, help them avoid the fate of Kodak whose business model became extinct, AT&T which was taken apart by anti-trust action, or General Motors whose product line came under unceasing attack from foreign competition.

Reasons to Invest in iQiyi

iQiyi is a Chinese company that was spun off from Baidu a year ago but which maintains a close relationship. The company is referred to as the Netflix of China. They aim to make premium subscription videos their core business. Right now they serve 20% of Chinese households compared to the 70% of American households that use Netflix. Considering that China has 1.3 billion people compared to 311million in the USA, the company has a lot more room to grow. Additionally, they are in video games and working on virtual reality. Right now the stock price is attractive because of the trade war between the USA and China. But, this is a Chinese company doing business in China and, would seem to be a Chinese company safe from tariffs. This company can be compared to Netflix, Microsoft, Apple, and other tech stories or to the early to mid-twentieth century stories of General Motors, AT&T, Coca Cola, and Eastman Kodak.

Reasons to Invest in Shopify

The rationale for investing in this company is that they appear to be well-positioned to take advantage of an expanding market in e-commerce. They are the “pick and shovel” approach when everyone wants to dig for gold. That is to say, Shopify assists businesses both large and small in selling their services and products online. This business niche is expected to grow to $25 Trillion by 2025. This company has a nice growth story but not the same sort of story as Alphabet or iQiyi when it comes to a fifty-year investment.

Is There a Safe Fifty-year Investment?

As we noted at the beginning, the Motley Fool article with its three suggested investments brought us to ask the question, is there a safe fifty-year investment? We write about the concept of intrinsic stock value so much that our readers can be forgiven if they get bored with the idea. Nevertheless, the best stocks to invest in are almost always ones that do well in intrinsic value analysis. However, this sort of fundamental analysis needs to be repeated on a routine basis. That is simply because the fundamentals change over time. New technologies replace old and Kodak goes from being the king of film, process, and printing photos to a footnote. Antitrust actions catch up with AT&T and break it up. The development of container shipping to support the Vietnam War effort brings cheap foreign products to America and undercuts American businesses including General Motors. The point is that in order to pick a safe fifty-year investment you need to be able to see into the future. What sort of investments will still be paying off half a century from now?

Your Home Is a Safe Fifty-year Investment

This is another point that we bring up every time that we write about how to start investing. You need a place to live and it is cheaper to own than to rent. The federal tax break for mortgage interest is unlikely to go away in the next fifty years. It is popular on both sides of the political divide and serves a good purpose of societal and financial stability. So, is there a safe fifty-year investment in home ownership? You bet there is and you should be taking advantage of that as early in your investing life as possible.

Are Investments That Don’t Lose Money Really Safe Investments?

We have written about how to invest without losing any money. Over the duration of a US Treasury, Bank CD, or AAA Bond, these are safe investments. You give up the potential for larger gains in return for protection against financial loss. But, over a fifty-year time span is there a safe investment in this arena? The problem with long term bank deposits, Treasuries, and AAA Bonds is that they may barely keep up with inflation or may even fall behind. As such, you will preserve your dollars at the same time that your dollars inflate and become less valuable. The closer you are to needing your investments in retirement the more you will want to be invested in this manner but over a fifty-year timespan, you need an investment that grows faster.

Dividend Stocks for Long Term Investing

In our article about dividend stocks, we provided a list of companies that have been paying dividends for more than 120 years. To keep paying dividends for this long the company has to be making money. Over the years, dividend stocks tend to outpace the market. As such, a safe fifty-year investment might come from a list of dividend stocks.

Technology Stocks for Long Term Investing

Is there a safe fifty-year investment in the tech arena? The telephone, automobile, and the film camera were “high tech” at the beginning of the 1900s. Companies that got in early and performed well dominated American business for nearly a century. And then they didn’t. The risk with tech is that you need a company that can “think on its feet” and not “rest on its laurels.” IBM comes to mind as a company that dominated the computer world until they missed the boat with small computers. Their mistakes allowed companies like Apple and Microsoft to become giants in the ever-evolving computer world. In this regard, we like Alphabet as much because it is diversifying and hedging its bets as for its dominance of internet search.

Safe Fifty-year Investments Are Ones That You Keep an Eye On

The bottom line for picking long term investments is that you need to choose wisely and, more importantly, you need to stay in touch with your investments. Whether your choice is an ETF that tracks the S&P 500 or an individual stock like Alphabet, you need to know why you choose that investment and you need to keep track to make sure that the investment still meets your criteria.

• Exxon Mobile
• Johnson Controls
• Coca Cola
• Colgate Palmolive
• Consolidated Edison
• Procter & Gamble
• UGI
• York Water
• Eli Lilly and Company
• Stanley Black and Decker

(List courtesy of The Motley Fool)

A common misconception is that dividend stocks are not growth stocks. However, over five and ten year time frames the best-paying dividend stocks usually outperform the S&P 500 by several percent! Dividends are sign that a company is making money with its business plan and dividends paid over a long time provide proof that their business plan is sound. When considering intrinsic stock value, steady and increasing dividend payments are a plus. But, before investing in dividend stocks, an investor should learn the basics of these investment vehicles.

Dividend Stocks

Dividend Stock Introduction

The reason that so many investors have dividend-paying stocks in their portfolios is that they like the steady payments. However, most investors, during their earning years, reinvest their dividends through automatic dividend reinvestment plans. With these plans there is commission or fee to pay and the vast majority of plans allow for the purchase of fractions of shares. The investor will pay taxes on these dividends but will have growth of their number of shares as well as the growth of the stock price. When an investor reaches retirement, they will typically stop reinvesting their dividends and simply enjoy the quarterly check.

Investors like companies that not only paid dividends year after year but also increase those dividends over time. The companies know that a large segment of their investors expect this and, as such, the company will manage its finances in such a way as to continue the same practice over the years, decades, and longer.

Companies that pay dividends are typically stable and as such are attractive to long term buy and hold investors. These folks may be mature investors looking to beef up their retirement income or younger investors who are patiently building wealth over the years.

What Is a Dividend?

Dividends are payments, usually paid quarterly, to shareholders of a company. The money comes from company profits, after taxes. Dividends are commonly paid by mature companies that have moved past their initial phase of rapid growth. The company has a big share of its market and will need to create new products and services through R&D to grow more. Thus, the company pays dividends to compensate its investors for its now-slower growth. Companies that commonly pay high dividends are utilities (power companies) which are very stable, have slow growth, and lots of money.

Investing in Dividend Stocks

An easy way to start investing in dividend stocks is to use a stock screener. Generate a list of stocks with the highest dividend rates and companies that have steadily increased their dividends over the last 5, 10, 15, or 20 years. It is important to look at the longer term when picking dividend stocks because long term dividend payments are a sign of the company’s financial strength while temporarily high dividends are often used by companies in trouble in order to artificially jack up their stock price.

Once you have picked a few promising dividend stocks it is time for fundamental analysis. This is another step in making sure that the company offers growth as well as dividends and that its business plan is likely to continue driving profits and increasing dividends into the distant future.

Selling Dividend Stocks

When a previously profitable company starts to lose market share and profits, they may continue to pay the same dividend even when their share price is falling. Thus, the dividend may look great, but when you look closely at the company you will see trouble brewing. As with all long term investing, when you are investing in dividend stocks, it is wise to periodically reassess your portfolio and discard any that no longer fit your criteria.
(Investopedia)

Dividend Reinvestment Plans

No brokerage fees

There are several advantages of reinvesting your dividends via a dividend reinvestment plan (DRIP). When you sign up for the DRIP with your dividend stock, you will not pay any brokerage fees when you reinvest dividends. And, if you choose to buy a few more shares with cash on hand, those shares can also be purchased without brokerage fees.

Automatic reinvestment

Except when you want to purchase extra shares, you can ignore your DRIP and simply let the company do the work of calculating shares and fractions of shares that will be added to your account every quarter.

Discounts

An often-overlooked feature of dividend reinvestment plans is that shares may be discounted by up to ten percent! And, this discount commonly applies to extras shares that you purchase as well.

Compounding returns

With a dividend reinvestment plan an investor will see a compounding effect in his investment. Dividends create more shares and those shares create dividends. This effect on your investment can be substantial with a company that pays a healthy dividend, increases it regularly, and pays dividends for decades at a time.

Downsides of Dividend Reinvestment Plans

As your investment grows with your DRIP it can be like a dream come true. But, don’t forget to pay taxes on those dividends. Actually, this part is not so bad because the company administers the DRIP and will send you a year end statement of taxable earnings.

(Fairmont Equities)

But, when it comes time to sell any of your dividend stock, it can be a pain sorting out the base cost of all the various parts of your dividend reinvestment plan in order to pay long term capital gains. And, when a stock price is volatile, an investor may wish to buy or sell in a timely manner. But, with the dividend reinvestment plan purchases are made when the company wants to make them which, in theory, will not be when you wanted to. This takes us back to the start when you are picking dividend stocks. Avoid stocks with high dividends but poor financials. Choose the stalwarts that have been paying healthy dividends for decades without fail and which have stable but growing stock prices.

For more insights regarding developing a dividend yield strategy, follow the link.