Waiting For A Correction When Many Stocks Have Already Corrected?

correctionI’ve noticed a lot of investors have been loath to invest new capital in the stock market over the last year or so in fear that a correction would occur and they’d lose money.

First, what’s a correction?

Investopedia defines it as the following:

A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.

Now, I’ll note that corrections are generally healthy. An uptrend left unchecked could lead to irrational exuberance. And like anything that reverts too far from its mean, the snap back could be quite harsh.

But I look forward to corrections for quite a different reason. And that reason is so that I can buy cheaper stocks. If a stock is $50 today, but a correction tomorrow brings it down to $45, I’m looking at the ability to buy more shares with the same amount of money. And since price and yield are inversely correlated, that also means (unless the dividend was cut in the interim) that I’ll receive more dividend income on my money. Now, one should be paying attention to value, not price. Price is just a number (that changes almost every minute of every market trading session) that Mr. Market decides something should be bought or sold for. Value, on the other hand, actually tells you what something is worth.

Assuming that a correction is coming to correct overpriced stocks, one would then assume that prices after a correction would be generally more in line with respective values. But that’s assuming all stocks are priced one and the same, relative to their valuations. And I don’t believe that.

The S&P 500 Appears Overvalued

The broader market has not only approximately doubled over the last five years, but it’s done so in almost one constant straight move up. We’ve had a couple drops along the way – notably in the summer of 2011, the spring of 2012, and the late fall of 2014 – but it’s largely been up, up, up.

What that means is that it’s easy for stock prices to move further away from their fair value as a group. While the broader market has doubled over the last five years, a lot of the earnings of companies I follow and invest in haven’t. So you could make a case that stocks were just plain undervalued at the beginning of that period, but I think you can also now make a case that, in aggregate, stocks are expensive now.

You see that with the valuation metrics of the S&P 500.

The S&P 500’s P/E ratio (using TTM EPS) is currently 20.46. That’s about 30% higher than the long-term mean of 15.54. If you use the Shiller P/E ratio, which is thought to be even more accurate because it smooths out one-year fluctuations in earnings, it’s currently 27. That’s more than 60% higher than the long-term mean. So I think a case could be made that we’re sitting on an expensive market here.

Warren Buffett has gone on record saying that he believes the best way to check the broader market’s valuation is to look at total stock market capitalization against GNP.

In a speech given in 2001, he stated:

If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire.

We can see that total stock market cap/GDP (works out to be quite similar) is just over 125%.

Certainly not cheap. Although, the ratio was 133% back when Buffett gave that speech in 2001 and he stated:

I would expect now to see long-term returns run somewhat higher, in the neighborhood of 7% after costs.

“Somewhat higher” is in reference to a similar speech he made back in 1999, when the ratio was much higher and Buffett thought long-term returns would thus be lower. So this ratio apparently doesn’t indicate the need for panic. Furthermore, Buffett just spoke on this subject quite recently when asked about it at the Berkshire Hathaway Inc. (BRK.B) annual shareholders meeting and stated that he only views stocks as currently expensive if rates start to rise. Otherwise, they’re not particularly cheap or particularly expensive.

Nonetheless, I think a case could be made that the broader market is overvalued right now – perhaps even significantly so. And seeing how rates will more likely rise than fall over the intermediate and long term, that would indicate that even Buffett’s recent commentary indicates overvaluation.

Looking At The Stock Market Like A Store

However, I don’t really concern myself with the valuation of the broader market whatsoever. And that’s because I’m not buying the stock market. I’m buying individual stocks whose individual prices have to be weighed against their respective intrinsic values.

I look at the stock market like a store. It’s a market filled with merchandise. Some merchandise is worth more than other merchandise. And some merchandise is cheap, while other merchandise is expensive. And sometimes there doesn’t appear to be any reason for this discrepancy.

It’s been said that it’s a market of stocks, not a stock market. I believe that’s the best way to look at the stock market. And that’s because not all stocks trade in lockstep.

Look, the market is my favorite store of all. I love shopping for stocks. While some might love shopping for shoes or spending all day in an electronics store, I could spend all day looking at stocks. Even better, my merchandise pays me to own it!

But just because I’m shopping for stocks and not shoes doesn’t mean that I’m not heading to the clearance section. If I need clothes, I’m going to buy the highest-quality merchandise at the best price I can, relative to the value of that clothing. So I’ll head to the back of the store, looking for discounted merchandise that nobody wants. Spending too much time at the front of the store might give you the feeling that the entire store is expensive. While that may or may not be true, that doesn’t mean all merchandise in the entire store is expensive all at the same exact time.

And just because the entire store isn’t on sale, that doesn’t mean specific merchandise isn’t on sale.

Would You Know The Correction If You Saw It?

There are a lot of problems with waiting for a correction, and I’ll explain why I don’t bother.

First, when you’re not investing cash in high-quality dividend growth stocks that grow your wealth and income, you’re technically losing money to inflation by not turning that cash into increasing cash flow. Your snowball slows and financial independence is potentially being put off.

Now, you could make the case that there’s an opportunity cost with investing cash rather than sitting on it, awaiting a sale across the whole store at which point in time your capital would go further. And maybe that’s true. But would you know the extent of the correction if you saw it? If the market drops by 10% this week, will you invest your cash? Or will you await an even better sale, thinking that the 10% drop portends even more sales? And how long do you sit on cash? I’ve read comments by some investors at various investment community sites inferring that they’ve been sitting on cash for years now, awaiting a major correction that still hasn’t manifested itself. Who’s realizing the opportunity cost? And how much does the market have to drop just for those sitting on cash to break even had they invested their money from the get go?

Timing the market is impossible. I’ve never heard of anyone that’s ever been able to do it with any regular consistency and success. But the good news is that it’s not necessary to be incredibly successful in regards to growing wealth and passive income. Long-term investors have time in the market, rather than timing the market, at their disposal.

If the market drops by 10% at some point here in the near future, I’ll be jumping for joy. While not all stocks trade in lockstep, a changing tide tends to affect all boats to some degree. But I won’t change my investing habits, and I’m not holding my breath. Furthermore, I won’t sit on cash if it were to happen, trying to anticipate future broad market drops based on what’s already come to pass. I’ll still be deploying capital just as I always have – regularly and consistently in the highest-quality stocks at the best possible valuations I can find at any given time.

However, a market correction isn’t necessary to find deals in the market. In fact, many corrections at the individual stock level have already occurred thus far in 2015. And you might not even have noticed. So if you’re awaiting a correction to deploy capital, many high-quality stocks have already corrected well past the traditional 10% yardstick to be considered a “correction” this year. I look forward to individual stock corrections just as much, if not more than, broader stock market corrections.

Discounted Merchandise

I’m going to list a few high-quality dividend growth stocks that are down more than 10% YTD and have “corrected” to various degrees in 2015. Now, price and value are different. Not every 10% drop in price necessarily means a stock is then attractively valued. If a stock is overvalued by 20% and subsequently drops by 10%, it’s still overvalued. But these names are solid starting points for further consideration, with some of them appearing substantially undervalued and others appearing somewhat fairly valued after prior periods of overvaluation. The store might be expensive, but I think these stocks represent merchandise that’s hanging out at the clearance section at the back of the store.

Union Pacific Corporation (UNP) 

This stock is down more than 14% YTD from previous highs that didn’t necessary indicate wild overvaluation. I’ve been actively buying this stock at a rather aggressive rate recently, and my analysis concluded that it’s potentially 16% undervalued right now. A high-quality railroad with built-in competitive advantages that are just incredible, this is a business I’m glad to own a slice of. Norfolk Southern Corp. (NSC) is another high-quality railroad that’s dropped by more than 15% YTD. In fact, most of the major railroads are down quite a bit this year, which, in my view, is a great long-term opportunity.

Wal-Mart Stores, Inc. (WMT) 

This is a stock that’s now back on my radar after falling from fairly lofty levels earlier this year. It’s now down almost 15% YTD, and now trading at a price that I think is far more in line with its fair value. I took a look at the stock back in late April and concluded that there was a lot to like, but the valuation was too high as the stock seemed to be worth about $70. Well, the stock has come down quite a bit even over that short period of time and I think it’s a pretty solid long-term investment here. Not overly cheap, but buying WMT at under 15 times TTM earnings and planning on holding for the next 20 or 30 years seems like a strong idea to me.

Omega Healthcare Investors Inc. (OHI) 

This is another stock I’ve been very interested in lately. It’s fallen just under 12% thus far in 2015, and now trades for a P/FFO ratio of just over 12 with a yield of 6.28%. This company has been an incredible investment over the last 10 years and I see no reason why that won’t continue for the foreseeable future. It’s the major player in its space here in the US and the long-term tailwinds are just incredible. I added to my position just last month and I’m currently strongly considering doing so once again this coming week.

W.P. Carey Inc. (WPC)

This international real estate firm checks off a lot of boxes for me, from yield to quality to growth. And its stock is down more than 12% YTD. I think it’s an incredibly compelling opportunity, which is why I’ve been particularly active with this stock. I initiated an equity stake in the company back in April and I’ve since added to it twice. A lot of “traders” (I use that term since long-term investors shouldn’t be concerned about short-term changes in macroeconomics) seem to be concerned with rising rates and how REITs will be affected (specifically, how they’ll be negatively affected as an entire group). You know, because their buildings evaporate, their tenants stop paying rent, the fundamentals strongly deteriorate, and REIT stock prices (they all behave the same, right?) drop like rocks when rates rise. Or not.

Procter & Gamble Co. (PG)

One of the prototypical dividend growth stocks with an amazing 59 consecutive years of dividend raises, it’s struggled mightily as of late – both the company and a stock. But is the drop of 15% YTD warranted? I think the stock got a little ahead of itself at over $90/share, but it’s a pretty decent long-term idea here at about $77/share, currently sporting a yield of 3.43%. I don’t think PG is the cheapest stock around, but its legacy, brand lineup, and quality are really fantastic. Recent initiatives designed to spur growth are exciting, so this stock could quickly grow into its valuation and shoot right past it. I wouldn’t go crazy here, but PG is back on my radar to some degree after a rather lengthy absence.

Hershey Co. (HSY)

This is a stock I’ve long ignored because, frankly, it’s been expensive over the last few years. And the growth never seemed to warrant the sky-high valuation, especially since somewhere around early 2013. But it’s now down 12.5% YTD, which has allowed the stock’s price and value to come back into alignment. I was recently discussing this stock with a reader and then I took a better look at it just a few days ago. The growth isn’t outstanding, but you’re getting a consistent company with a very simple business model that’s very unlikely to change much over the next 50 or so years. Dominant market share here in the US with great brands offers a lot to like, although recent stumbles in China are slightly concerning. Nonetheless, I think it’s roughly fairly valued here, which appears to be an opportunity to buy into one of the oldest and highest-quality consumer companies around with seemingly few immediate headwinds.

National Oilwell Varco, Inc. (NOV)

There’s no doubt that the energy sector is under fire (pun intended) lately. But some of the drops, especially in the oilfield services industry, seem to be unwarranted. NOV is down more than 25% YTD, now trading for a P/E ratio of 9.44 and a yield of 3.76%. They’re still working through their backlog and that’s buoying earnings for now. However, even a massive drop in earnings still offers a lot of long-term value here. It’s a volatile stock and there could be more short-term pain ahead, but I think the long-term potential is extremely promising here.

Royal Dutch Shell PLC (RDS.B)

Another energy name, Shell’s stock has fallen over 15% this year. Like all the other supermajors, a good chunk of the drop is warranted due to the change in underlying commodity pricing that started last year. Furthermore, Shell actually has some of the weakest fundamentals of its peer group. However, it does have some redeeming qualities like a lower valuation compared to the big US-based supermajors as well as a much higher yield. At 6.38%, Shell’s yield is among the highest I track across all high-quality stocks. I’m not sure we’ll see a dividend raise from Shell this year, especially if commodity pricing doesn’t improve. But with that high of a yield, you’re already getting a very healthy income component attached to this stock.

Conclusion

The broader market does appear to be overvalued right now. But the market has seemingly been overvalued for some time now, with the Shiller P/E ratio being well above its long-term mean for more than five years now. Waiting for that reversion means you’d be sitting on cash for that entire time, missing out on the opportunity to own pieces of wonderful businesses that will very likely reward you with growing dividends and growing wealth for decades to come.

The stock market is basically a market, or store, like any other, filled with merchandise that one can purchase during regular business hours. While I’d love a cheaper store, I find it not all that difficult to walk to the back of the store and find the discounted merchandise that others are apparently less interested in. Some discounted merchandise isn’t particularly high quality, but other merchandise, like that listed above, is.

I leave you with some eternal wisdom by Buffett – an excerpt of a speech given in late 1999 on the valuation of the stock market (this mirrors my own philosophy down to the word):

At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that the markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.

Full Disclosure: Long UNP, NSC, WMT, OHI, WPC, PG, and RDS.B.

What about you? Waiting for a correction? Would you know the extent of it when you saw it? Value individual companies rather than the market? Think these stocks have corrected enough to warrant a look?

Thanks for reading.

Photo Credit: zirconicusso/FreeDigitalPhotos.net

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143 Comments

  1. Hi DM,

    This was a good article to read right now as I think a bit about an upcoming stock market correction from time to time, but try to brush it off my shoulder as I continuously dump funds into the market. This opened my eyes a decent bit, to see the drop YTD in certain stocks definitely eases the stress of potentially purchasing near-term depreciating shares. But that’s the way of the market.

    I’d definitely love to see a 10% drop in a couple shares too to make a jump, haha. Good read man. Always a pleasure.

    DB

  2. Hi Jason

    A very good post. I’ve had the similar views for a while now. No sense waiting on the sidelines earning negative real returns on cash.

    There are plenty of safe, reasonably valued stocks for the long-term. Lately, Unilever has been going down as well. If it gets below 35 euros, I may scoop up some more. For me, buing some companies in the eurozone once in a while holds some appeal. Over half of my dividends already come in foreign currencies (USD, British pound, Swedish crown). “the European PG” ain’t half bad.

    It’s hard to overlook US companies though. UNP, HSY, JNJ, EMR would fit my diversification nicely as well. I’d say that the valuations for some of those names are either ok already or near my buy zone.

    I hope those guys on Wall Street chant amongst themselves the usual “sell in may and go away” -tune. More opportunities for the likes of us 🙂

    Cheers

    Jarmo

  3. I own four of your highlighted stocks and I’m looking hard at RDS.B. Great minds think alike!

  4. DB,

    Yeah, I think one’s anxiety regarding a correction increases as their portfolio size increases. If the market were to drop, say, 10%, my portfolio would drop in value by about $20,000. In comparison, your portfolio would drop $1,000. Now, imagine what it’s like to run Buffett’s portfolio – a 10% drop means it’s down by $10 billion. When you look at it like that, a market correction is really nothing to fear. Besides, the new capital you’re investing will decline much less than that of the entire portfolio anyhow (in terms of absolute value), meaning you really don’t have anything left to fear. Keeping $5,000 on the sidelines waiting for a correction makes no sense when $100,000 or $200,000 is already out there working for you.

    That said, it’s really just a matter of focusing on value, irrespective of the broader market’s valuation. Buy severely overpriced stocks (especially those that are also low quality) in any market environment and you’ll likely be punished at some point.

    Cheers!

  5. Jarmo,

    Yeah, I do love Unilever. The UL shares are up over 6% YTD, so I obviously didn’t include it here. But I’m glad to have had the opportunity to load up back at ~$40/share. Great company.

    I hope those Wall Streeters repeat that chant every month. Would love to see some cheaper stocks. 🙂

    Best regards.

  6. Jim,

    RDS.B offers that really juicy yield and a lower valuation compared to its US counterparts, though I think it’s warranted due to the relatively lower-quality business. We’ll see how it goes!

    Cheers.

  7. Finanzasmania,

    Hope you found some value in the post! 🙂

    A lot to like with WPC and OHI. Been putting my capital to work there lately. I think we’ll do well.

    Take care!

  8. What do u think about Baxter , with the upcoming split. It’s almost at 52 week low too.

    Thanks,
    DG

  9. Dg,

    Baxter is another great stock to consider. I didn’t list it only because there’s some uncertainty there regarding the spin-off, but it’s a great business, from what I can see. In regards to what I think, I’m not really aware that much has changed since the last time I analyzed it:

    https://www.dividendmantra.com/2014/06/recent-buy-7/

    However, I think that’s just another example of not all stocks moving in lockstep when it comes to pricing or value.

    Cheers!

  10. I couldn’t agree more on these stocks… most of them I’ve either recently bought or been watching carefully. OHI and WPC particularly are causing me to fumble to add more beebees to the gun. I’m a bit surprised you didn’t add OKE to your list… any change in sentiment there?

  11. Soggy,

    I hear you. I’ve already deployed a healthy sum of capital this month and yet I’m still looking for more. 🙂

    The stock list wasn’t meant to be all-encompassing or somehow comprehensive – I wasn’t listing all dividend growth stocks that have declined by 10%+ YTD. Rather, these are just a few examples used to back the thesis of the article and provide a few candidates for further due diligence. And I could go pretty crazy there in the energy space since there are so many that have declined heavily over the year. But I’m still a happy OKE shareholder.

    Best regards!

  12. I might try to keep a bit more cash on hand but I still want to remain fairly close to fully invested at most times. I have no idea when the market will correct and the worst part about that is that you have to also figure out the timing of when to move back into the market. Is a 10% decline enough? Would you need a 20%? And then you have to battle your psychological and emotional constraints that will tell you not to invest capital. If you just saw a 20% decline in the stock markets as a whole are you really going to make a big move back into the market? I can’t remember if it was the beginning of 2013 or 2014 but I know myself and several others were expecting a correction so I tried to hold on to a bit more cash than usual. That didn’t materialize at all. And all companies don’t move step for step in most market scenarios. Like you mentioned there’s some companies that are down double digits YTD but I’m sure there’s also several that are up just as much. The biggest thing is to remain consistent in your process. There’s a difference between waiting on a correction and waiting on the values to come down and I think that gets lost sometimes. But Mr. Market tends to offer opportunities from time to time on even the best companies.

  13. JC,

    Just can’t time the market. And it’s not necessary anyhow. If timing the market were necessary to achieve long-term financial success and independence, I’d still be working at the car dealership.

    I remember coming across this comment by one prominent commentator over at Seeking Alpha mentioning back in late 2012 or something about how he wasn’t going to buy any stocks until there was at least a 10% correction across the board. The problem with that line of thinking is that, as the market advances, that 10% mark grows and grows. Now the market would have to correct by something like 30% just to break even, and that’s before factoring in growing dividends over that time frame.

    I also keep in mind that the portfolio is what will really see the brunt of any short-term capital losses, which aren’t really “losses” unless I sell. The capital I put to work on a regular basis is small relative to the overall size of the portfolio. So unless you’re buying and selling stocks in large swaths and moving in and out of cash to a large degree, the attempt to even time the market at all doesn’t really make any sense.

    But let’s hope we see that market-wide correction. I’d be more than happy to see my new capital work that much harder. 🙂

    Cheers.

  14. I bought some KO and JNJ on Friday to bolster my existing positions. I’m also liking PG, HSY, HOG, WFM right now.

    What are your thoughts on BAX?

  15. Thanks for writing up that post DM. Keeps us focused on the discounts on the market 🙂
    Yeah Baxter is in the process with Baxalta.. a bit mixed up.

    I will be buying WMT as soon as I got capital available.. will be in like.. 1 week.
    Hope that it will stay low for a while. It might be hitting 70 but not lower then that.

  16. blahblah903,

    Nice moves there. More stocks than capital, right? What’s new? 🙂

    I still like BAX. Nothing has changed since I last took a good look at it last summer. I have a full position and there’s some uncertainty there regarding the execution of the spin-off and how the dividend will play out, so I’ve held off from adding more. It’s a stock I continue to consider, though. But if I were to add, I think I’d want to do that in the next week or so before the spin-off. And it doesn’t look like that’s going to happen. We’ll see. Maybe I’ll add just a few shares before that spin-off goes through, as BAX has a pretty good history of doing well by shareholders with the spin-offs.

    Best wishes.

  17. Mantra,

    Great post during this time as the market of stocks (as you said) shows some of the “merchandise” going on sale. The market for the stocks overall may be overvalued, but us investors do not buy the entire market. We buy stocks within the market that have received discounts relative to their true fair/intrinsic value – and damn, if you have capital and love investing, then these 5-15% downturns in specific stock prices should start making you smile, and smile big.

    Thanks Mantra, I am sure the readers will thoroughly enjoy this one.

    -Lanny

  18. DDT,

    I think you’re making a great move there with WMT. I don’t see how you go wrong with buying one of the world’s most dominant companies at 15 times earnings, especially in a market that’s much more expensive. I don’t think it’s overly cheap here, but I doubt you’d regret how it plays out 20 or 30 years down the road.

    Sorry to hear about the recent trading troubles. But it’s better you learned about the risks early on in your journey. 🙂

    Have fun shopping over there!

    Best regards.

  19. Lanny,

    Absolutely. It’s a store like any other. Some merchandise is surely very expensive. And other merchandise is on sale. Just gotta stick to your guns. 🙂

    Thanks for dropping by. Hope you’re having a great weekend over there!

    Best wishes.

  20. hsy has pay a dividend every year since 1930. the hershey trust holds the majority of
    hsy stock. in 2000 they paid a yearly dividend of .54…at the end of this year , the divvy will be around 2.12 for the year…if my math is correct, that’s around a 400% increase in 10 years!
    for a dividend investor, that’s pretty nice..not too many people’s wages have gone up 400% in the last 10 years. if people are looking for fast gains in a stock price, hsy isn’t the place to be, however i agree with you that around $90, it’s fairly priced. hsy is looking to buy chocolate companies in india, as well as china. people love chocolate , no matter
    what’s going on with the economy.

  21. Great discussion starter Jason. I for one am very optimistic about my future opportunities to put money to work. My past investment has performed well ……plus many have continued to pay me ever increasing quarterly dividend. I am getting excited about many of the “bond proxy” companies, now that interest rates have started moving higher. Many utility companies and railroad stocks have moved substantially lower, as you describe above. I look forward to increasing my allocation to REITs as well. Additionally, the energy sector has given me a chance to make sizable investments this spring. At the moment I am most optimistic of agricultural commodities.

    Have a great week
    -Bryan

  22. Dividend Mantra,

    Well written article. People wait and wait for a correction to come which leads them to hold on to their cash. Before they know it 3 months goes by then 6 months etc. With the markets going up, it is a little more difficult to find stocks trading at good prices but not impossible. A good example is the railroads. WMT is another one. Even up in Canada, Walmart has a steady line of customers.

    REITs are another example. The REITs will fall some when the interest rates rise but investors do not have a crystal ball to know when this will happen. They can average down, to lower their cost basis when this happens if their is nothing wrong with the company fundamentally.

  23. Hey Jason/Sensei!
    I once read that many of the UK retirement plans are hugely invested in Shell and BP and thus these companies have a huge commitment to maintaining their dividends. Any thoughts?
    Regards,
    Tom

  24. Jason,

    Fully agree. I’m looking at valuations of individual companies and in fact, some of these companies are at “bear”ish level. I’ve recently bought KMI, RDS.B, OKE, HSY, and VOD and keeping an itchy finger to pull trigger on few others 🙂

    Also, I’m considering some of the financial companies: WFC, BNS, TD and others as rates have only one way to go : up and these companies should be rewarded.

    Keep it coming.
    PIM

  25. Hey Jason another well wrote article. With the strong dollar and the strengthening bonds they are bring down some of my stocks so I am buying them at better prices. I have KRFT and OA on my radar to maybe add to my portfolio. You are correct about market timing it doesn’t work. keep up the good work. Later

  26. vince,

    Hershey runs a great company. The returns over the last ten years haven’t been that great, but I think a lot of that is due to chronic overvaluation. It’s come back down quite a bit here, which makes it a lot more attractive. Great brands and great history there.

    Thanks for sharing your thoughts!

    Take care.

  27. Bryan,

    Value moves around, that’s for sure. While the overall store is historically expensive, there’s still some discounted merchandise if you pick around a bit. Glad you’re taking advantage of those opportunities out there! 🙂

    Thanks for stopping by.

    Best wishes.

  28. IP,

    Thanks so much. Hope you enjoyed it. 🙂

    Yeah, I’ve never really understood the reasoning behind trying to time what really can’t be timed. It’s like people see something that is truly impossible to do, yet they think they’re somehow smarter than everyone else and able to do it. I don’t know if that’s ego or what, but I don’t bother. Fortunately, it’s not necessary to time the market to achieve incredible success and financial independence. Now, a correction will come at some point. The longer it takes, the more severe it’ll probably be. But I have no idea when it’s coming. And neither does anyone else.

    Meanwhile, there’s some discounted merchandise out there. I see some 10%, 15%, and even 25% sales going on. The clearance section is calling my name.

    Cheers!

  29. Tom,

    Well, anything is possible when we’re talking about commodities due to the volatile nature of pricing. Right now, FCF is weak for both firms. However, there’s a lot of flexibility there with strong balance sheets and the possibility of asset sales. But I’m not sure how much dividend growth we’ll see for the foreseeable future as both are paying out rather substantial dividends.

    Cheers!

  30. vince,

    Well, HSY paid out $0.54 total in FY 2000. They then paid out $2.04 in FY 2014. That’s an increase of 278% over that period. Very solid, though not quite 400%.

    Cheers.

  31. PIM,

    The increase in rates will surely come at some point here, and that bodes well for a lot of financial firms. I just recently picked up shares in TRV – they’re sitting on an investment portfolio north of $70 billion. So they’ll do well with the ability to seek out a better rate of return on that money.

    Still plenty of cheaper merchandise at the back of the store. Glad you’re seeing some merchandise you like. 🙂

    Best regards.

  32. michael,

    Thank you!

    We’re really fortunate in that timing the market isn’t necessary to achieve incredible financial success and independence. Slow and steady works. 🙂

    Keep it rolling over there.

    Best wishes.

  33. Jason, i enjoyed this article. Very timely. The end of last week i nibbled on PM, MO, KO, and WMB.

  34. Jason, this is a very good article. Over the period of time I’ve been investing DGI stocks, I see opportunities all the time. Even MMM seems to be fair now!
    I completely agree with you that a correction is not necessarily a bad thing. It is a good buying opportunity except that your mindset needs to be strong.
    Keep up your good work!
    D4S

  35. Great article. I’m getting excited myself about this drop. Yes S&P is only 2% off its high, but I see JNJ over 10% off its high from 1 year ago (even though its EPS is up 5% since then). I see MO now 15% off its blow-off high. Been loading up many times on WPC, also added to VTR, small stabs at O, and looking at other reits.

    For those waiting for a crash—we just had one–many Reits are down over 20% in the last 2 months. Late 2014 to earlier this year, the stocks to buy were industrials, like GE, UTX, ETN many were down 20% or more off their mid 2014 highs…even as S&P was at new highs.

    There’s always a relatively bearish market out there, that provides value. Now it is Reits IMO, many consumer staples are coming in…want them to come in some more, but they may the best options for DGI’s. Yeah, it’s no 2008-2011 were you can close your eyes and buy any dividend aristocrat and it was on sale..you just have to look a little harder now, and have patience.

    Anyway great post with finally articulated points, as always–cheers.

  36. I have purchased every single stocks that you have mentioned in “Discounted Merchandise”. I have bought them all in last week and half and I am planning to add them to all if they drop 4-5% more in next week or so.

  37. I really like the timing for this article and I can see this is a bit of a hot topic with so many comments already. There are so many stocks which have taken a beating already. I too have my eye on a few including PG, MO, XOM and KMI. However I wanted to get your take on REIT’s in general. Personally I’ve been thinking about adding to my position in O this past week or so but with interest rates hikes on the horizon I don’t know if it is a wise decision here. Do you think the rate hike is priced in already or is the worst still to come ?

  38. joel,

    Glad you enjoyed it. I don’t often discuss the broader market, but I thought it was important to make a few points here. 🙂

    Cheers!

  39. Mike,

    I’m not particularly interested in HCP. OHI gives you exposure to the same industry, but it yields more and offers a lot more growth. In addition, the valuations are similar. I think OHI is just much more preferable.

    HCP is also having some issues with their largest tenant.

    Best regards.

  40. D4S,

    Thanks so much!

    Yeah, a correction is definitely not a bad thing. I wish we’d see the broader market drop at least 10%, but it’s good to know in the meanwhile that there is discounted merchandise out there. Just gotta head back to the clearance section. 🙂

    Thanks for stopping by.

    Take care!

  41. Ben,

    Absolutely. Value moves around. And that’s something I was kind of mentioning when I was discussing sector allocation a little while ago. When you focus on the value – as it moves – you’ll very likely diversify and round out your portfolio over time just because different sectors are oftentimes expensive or cheap at different times.

    I agree with you on the REITs. I’ve been pretty active there. Utilities have dropped quite a bit as a group, which was a long time coming. The store might be pricey, but not all merchandise is. 🙂

    Thanks for sharing your thoughts! Much appreciated.

    Best wishes.

  42. CrazyEddie,

    I don’t follow ARI at all. I’ve written extensively on keeping things simple, and that business model looks complicated to me. Furthermore, they don’t have any kind of track record for dividend raises. Just not on my radar at all, and unlikely to be at any point in the future.

    Take care!

  43. AJ,

    I guess we’re 100% on the same page here. 🙂

    HSY is one we discussed recently. Not overly cheap, but I think the stock has rightfully corrected back toward its fair value here. The stock perhaps makes more sense right now than just about at any point over the last couple years.

    Keep it up!

    Best regards.

  44. Captain,

    Well, I included a link in the article about how REITs have performed during periods of rising rates, and that research goes back a long time. The only issue there might be that rates have long been in a secular downtrend, so that’s something to keep in mind. But I really don’t even for a second think about rates rising insofar as investing in REITs. If rates are rising, that would generally mean that the economy is doing better, which would mean good things for REITs across the board. Furthermore, rising rates affect all businesses to some degree, not just REITs. And as far as whether or not the worst has come to pass, that’s really a sort of timing, which is something that I’m admittedly not at all good at (nor is anyone else).

    Thanks for stopping by!

    Best regards.

  45. I like your valuation of current US stock market!

    I also read an article mentioned:

    http://www.marketwatch.com/story/simple-math-will-determine-what-happens-to-stocks-when-rates-rise-2015-05-28?dist=beforebell

    “Raising the interest rate on 10-year Treasury bonds from today’s 2% to 4% — in line with Fed expectations — would halve the present value of the stock market.”

    OMG: it’s 50% of market correction…

    IRR calculation:
    2%=IRR(-100,2,2,2,2,2,2,2,100+2)
    4%=IRR(-100,4,4,4,4,4,4,4,100+4)

    Thus,
    NPV(2%,2,2,2,2,2,2,2,2,2,102)=100
    NPV(4%,2,2,2,2,2,2,2,2,2,102)=85

    it would be a correction of 15%, not 50%…

  46. Dear Jason!

    Very well … timed;-) … article!
    Wholeheartedly agree!

    @all investors with long time horizon (doublespeak?)
    – cash flow is better than cash (see DMs wonderful blog entry!)
    – tune out the noise
    – keep calm and carry on bulding your individual moat
    – volatility/even corrections are no threats but opportunities; a sell
    – If you have stocks you handpicked, you believe in, than there is nothing to “fear” by Mr. Market´s rage!

    Personally, I crave for some more serious cash to invest right now, which will materialize quite soon, as I fired the BigGun and got plenty of OHI and O.

    So, I have to be patient now, hope for even more “corrections” and keep on observing TROW which literally screams at me: “add me!”. 🙂 🙂

    Have a nice week
    Thorsten

  47. Mike,

    I’m not sure I’d say PG is a steal here. Its current P/E, P/B, and P/S ratios are all higher than its recent historical average. And underlying profit growth has been poor since about 2008, which is why the most recent dividend raise was very small. That said, if the renewed focus and growth initiatives pan out, it could grow into this valuation and beyond it. Still a great company with a ton of billion-dollar brands. A lot to like for the long haul, and the YTD price action means the stock’s a lot more appealing.

    Thanks for dropping by!

    Best regards.

  48. leon,

    Yeah, nobody knows when/how much rates will rise and how exactly that’ll affect the stock market. It’s all speculation and noise. That said, I think a correction is overdue, so we’ll see. I’d surely like to see the broader market drop by 10% or more and take most of the stocks I’d like to buy with it. Wouldn’t mind seeing the clearance section expand its selection a bit. 🙂

    Cheers!

  49. Thorsten,

    Thanks for sharing your thoughts. I guess it is indeed a “well-timed” article. 🙂

    Definitely agree with your sentiments over there. TROW was screaming at me as well, so I recently added just a few shares before the ex-dividend date. Really solid fundamentals.

    Best of luck finding more ammo for your gun!

    Cheers.

  50. Hi Jason,

    I agree with you that waiting for a correcton is useless. We all don´t know when this will happen. If I look at my watchlist, I can see a lot of companies which are quite attractive to buy now. There are some areas which came back. On the other side the main US indices are still high, opposite to some European stock markets. The German index went back nearly 10% from its high but I still believe, that German bluechips are too expensive at the moment. So I´m looking to America and I like the new valuation of the REITs and some other dividend stocks which came back.

    On the other side I´m still looking to market growth shares like AAPL and GILD. I initiated my first small poszion in GILD with 10 shares. Not much dividend yield at the moment, but this is my first small buy. In May I added some AAPL and will do in August with GILD & AAPL. But there is some additional money to deploy and I think I will buy some positions in shares which just dropped 10-15 %. OHI is one favourite and maybe I will open PG as I don´t have them in my portfolio.

    The most important is to invest regularly and to look, which opportunities you can find. All the companies above in the article are buys for me. The main reason not to own them is that I do not have enough money for all of them yet. But I don´t mind, in the future I surely own some of them. Very nice article.

  51. The energy sector is on correction mode as the price of commodities fell. The REITs too are getting hit with the rising rates. US companies that have high international exposure have lower revenues and lower earnings due to rising US $ currency. There is always something going on that will drive the market and timing it is mission impossible. But value investors like you and me welcomes volatility and view it as an opportunity to own more shares of the same company at a discounted price.

    I agree with Thorsten above, very well timed article 🙂

  52. Jason,

    For people sitting on a lump sum, what are your thoughts on DCA (dollar cost averaging) as an investment strategy? I ask because I know a couple of people in this situation and they’d rather play it safe with any low-risk investment vehicle than dump money in at a time when it seems like there’s a correction coming.

    I, of course, am not willing to dole out advice because (as you can probably tell) I am still green in this area, but from what I’ve read about DCA, it seems like it would incur far less risk while still taking advantage of some of the growth we’re seeing.

    What would your advice be?

  53. thank you for your reply.
    i am waiting for a big crush for years, and i believe all value investors will be happy to see the correction happens!

  54. Awesome article DM! I really enjoyed it.

    I definitely related to your comment about the opportunity costs of sitting on the sidelines waiting for a correction (2013 for me). I kept getting swept up in the hysteria that a bull run could not continue, and there would be an imminent market crash, the sky is falling, etc.

    Thankfully I stumbled across your blog in 2014 and was inspired to start my own DGI journey. I have never been happier. For the past year, I’ve just tuned out the noise and have been consistently buying the very best companies at attractive valuations. These days, I just smile as I see my forward dividends continue to grow, no matter what the market is doing. And if/when we do get a serious correction, I’m going to be jumping for joy. I’ll be enthusiastically buying those same quality stocks on sale!!

  55. Hey Jason, thanks for the well timed article. I’ve been buying REITs lately since it’s an area I’ve been under-allocated to. I also am still finding some value in the industrial space. I just initiated a position in CAT even though I think it might pull back further this summer. Hope so anyway 🙂 Take care man.

  56. PG might be a good buy, think I will take a little nibble today. WMT and PM got a bite last week. I think PG shedding brands will help it focus. Unilever has been a great example of a focused, dominate large cap company, in my opinion.

  57. Excellent article! It’s funny how we, as dividend investors, are on the sidelines cheering for a downward trend in prices so that shares become cheaper. When these corrections occur, I’ll definitely stick with the dividend champions, companies that I believe will continue to increase their dividends. Even during the Great Recession many of the companies that we’re invested in continued to increase their dividends. I sleep better at night being invested in individual companies rather than the market as a whole.

    I wondered if you’ve recently looked at CAT. The current share price is far removed from its 52week high of $111.46.

    Well, maybe I’m biased because I deal with many Caterpillar products at work and love the product.

    Anyway, I’m more of a believer in the efficient market hypothesis. Most financial gurus fail miserably when they try to time and beat the market, I recently read that Jim Cramer was only correct 47% of the time on his predictions. However, what you’re doing is definitely working and you have the numbers to prove it!

    Happy Investing!

  58. Jason,
    Thank you for your comments. I’ve been following your site, SA, and DTA sites for about two months now and find it very helpful and insightful.

    Keep up the good work. You certainly have done well!

    CrazyEddie

  59. Yeah I strongly consider the railroad companies and bought WPC last month.

    On my watchlist are also HOG, ANDE and THO. Small companies which are a little more volatile but for a little part of my portfolio they seem to be good enough. What do you think about these stocks?

  60. Mantra,
    One thing that also helps is the huge size of your stock market there in Americas. In such huge store there is always something on discount.
    You know, here in Finland, how many high-quality dividend paying companies do we have… well, I would say about 5 (and even with the best 5 you can’t really expect Dividend Aristocrat kind of consistency).
    Think about it, how fun would it be always choose from the same 5 companies when you have capital:D Well, luckily you are not stuck in such tiny market, and I’m not either any more!

  61. Hey Jason, great website. I have spent the last week or so going back through your journey and it has been really fun to read.

    I had a question about OHI. I have actually been looking at this company as well. What I am having trouble getting to is the 6.28% yield. Did they recently announce an $0.18/month dividend? If I look at the past year it looks like the dividend payment is rather sporadic and not necessarily quarterly or monthly. Just wondering what your thoughts are on their method of dividend payments.

    Thanks again for providing readers with so much information!

  62. olli0816,

    I’m with you 100%. Nobody knows when a correction will happen, how severe it will be, or how long it will last. All we can do is focus on individual companies and their valuations, quality, and fundamentals. Pull the trigger when things look right and hold for the long term. We’ll very likely do well with that strategy, with the occasional correction just adding fuel to our fire by providing cheaper stocks and higher yields. 🙂

    Value definitely moves around. Not just sector to sector, but also from geography to geography. I don’t really pay any attention to the German stock market, but it sounds like you’re finding value elsewhere. It’s good to be a capitalist investor in this day and age when you can invest anywhere.

    Thanks for dropping by!

    Best wishes.

  63. I appreciate your thoughts as always. What has me looking at Royal Dutch Shell is what looks like pretty reasonable debt levels and a decent profit margin compared to peers (in addition to the big current yield). Haven’t really done the due diligence yet, however. Best wishes.

  64. FFF,

    Yeah, the value is there if you know where to look and start sorting through the clearance section. 🙂

    Let’s indeed hope for increased volatility here in the near future. My limited capital needs all the help it can get!

    Cheers.

  65. FI Monkey,

    That’s a good question. And I always answer it the same way.

    Research seems to indicate that you’re better off just investing all of the money right away:

    http://pressroom.vanguard.com/content/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

    Of course, that’s looking at the overall market and not picking out specific opportunities as volatility and value allows. Nonetheless, that’s the research. And that’s kind of why I prefer investing cash somewhat quickly, preferring to turn that cash into future cash flow.

    That all said, I would still probably dollar cost average my way in if I had, say, $100k or something to invest all in one shot. And that’s only because DCA is all I know – I’ve built my portfolio with incremental cash infusions over the last five years. Furthermore, I’m not sure I could find enough deals to just spread $100k over. $50k? Probably so. But if we’re talking about a lot of money, I’m not so sure about that. So I’d probably just continue to look for value wherever it might be and invest as I find that. Maybe it would take months or a year, or maybe it’d be quicker. But I wouldn’t just open up my account and deploy $100k all in five minutes or something. That’s just me.

    Hope that helps!

    Cheers.

  66. Becky,

    That’s good stuff. So glad the blog and my journey have inspired you and changed your focus a bit. Dividend growth investing is really fantastic because it totally shifts your perspective. No longer are you really worried about or looking at the daily movements of the stock market. Instead, you’re focused on the growing dividend income against your expenses, which means you’re slowly becoming financially independent with every subsequent stock purchase and dividend raise.

    Keep it up over there!! 🙂

    Best wishes.

  67. wes,

    Thanks so much. Hope you enjoyed it!

    I hear you there on the REITs. I added a little more WPC lately and I may add some more OHI if the price remains weak. The doomsayers who want to sell REITs because interest rates tick up a bit have a very happy buyer over here. I’ll find a home for those shares. 🙂

    Thanks for stopping by.

    Best regards.

  68. Steve,

    We’ll see how it goes with PG. They still have a core business that’s really wonderful. And perhaps the renewed focus gets them back in gear. Meanwhile, the recent pullback in this stock has made it a more compelling long-term opportunity. I don’t think it’s the best idea around, but I also doubt someone would be unhappy with their income, income growth, and total returns for the next 10 or 20 years if they buy here.

    Cheers!

  69. DT,

    Value/dividend investors are perhaps a different breed, but it really all makes sense when you think about it. If you’re accumulating assets, cheaper is definitely better. I guess some just hate volatility, and don’t mind paying ever-rising prices for stocks so that they don’t have to deal with it. Less stock for more money just to avoid seeing red. That’s an expensive psychological stance.

    CAT is okay. I’ve long preferred DE in that space because it’s just a better company across the board, in my view. Not real sure I have room for/a need for both in my own portfolio, so I’ve just not really found a compelling reason to buy CAT.

    “Anyway, I’m more of a believer in the efficient market hypothesis.”

    If I believed in EMH, I’d just buy index funds. EMH is a theory that states it’s impossible to beat the market. So I don’t know how I’d reconcile my belief in EMH while investing in a manner that is against that belief. I personally don’t believe in EMH whatsoever, which is why I invest the way I do.

    Cheers!

  70. mephisto,

    I’ve just never been real interested in auto manufacturers due to my experience in the auto industry, but HOG seems pretty solid. The fundamentals are there, though the company hasn’t really grown much at all over the last decade. I wonder if that’s due to their prime demographic aging out of their products?

    ANDE isn’t one on my radar. Interesting business model, if a bit broad. Though, the routinely negative FCF is concerning. I’d have to investigate that a bit further and find out why the FCF is so volatile and somewhat frequently negative.

    Cheers!

  71. DL,

    Good point.

    One of the great things about being an investor in 2015 is that we have access to global markets now. Technology has made investing and achieving financial independence so much easier. It’s almost shocking that people aren’t routinely retiring in their 40s and 50s because it’s just so much easier than it ever used to be. So while your domestic store might be small with limited merchandise, there are a lot of other stores out there now that allow you to shop online. I don’t know how your brokerages work over there in Finland, but we here in the US have access to the US market (which is the most robust in the world) as well as any others out there. We’re incredibly fortunate.

    Thanks for stopping by.

    Best regards.

  72. Really great article. You should turn this into a “series” — quality stocks that are trading 20% off their highs, etc. That’s an article I would look forward to every one to three months.

    After ignoring $HSY for awhile, I’ve been adding to it heavily (for me) — 20 shares in the past week or so. With me just spot checking info, it looks like 2.3% has been a good entry point. With an as-of-yet unannounced dividend increase coming up, at current levels, I expect it to yield 2.6%. I wonder if the price will then quickly catch up to the yield. So….I’m buying now and expecting at least a 10% increase. Internationally, they don’t have a strong presence (I want to say I read that in China they operate at a small loss), so if they’re able to get international profitable, the stock has some room to run.

    RDS.B I’ve been looking at and have come close to pulling the trigger a few times, but the dividend sustainability scares the crap out of me. I know blood in the streets and all that but it screams value trap to me.

  73. Nick,

    Thanks for checking out the site. A lot of articles now (almost 700), but the archives and categories should make it easy to find what you’re looking for. There are also two search bars.

    As far as OHI goes, they announced a prorated dividend due to the timing of the acquisition of Aviv:

    http://www.omegahealthcare.com/Mobile/file.aspx?IID=103065&FID=28241140

    Though it was split in two, it actually effectively resulted in a $0.01 sequential raise.

    Hope that helps!

    Take care.

  74. You’re right about recognizing a correction. I’m terrible at market timing and I hesitate to buy during a correction. Who knows if it’s going to drop further. That’s why I just keep buying as I accumulate some extra cash. I just picked up a few shares of OHI by the way. Thanks for the recommendation.
    When we have a big obvious correction (25% drop?), then I will trade in our bond funds for stocks.
    Having no cash to buy stocks when they are on discount is a problem too.

  75. Adam,

    Yeah, that’s a good idea. Maybe this is something I’ll revisit occasionally, though just concentrating on the stocks that have fallen substantially YTD. 🙂

    HSY seems like a much more compelling idea now than just about at any point over the past few years. I still don’t think it’s particularly cheap, but you’re getting a really high-quality company with a very easy-to-understand business model that’s unlikely to change much over the next few decades. And that’s worth something. The dominant domestic market share probably isn’t going anywhere, which will allow them to focus more on the international operations in the future.

    Keep it going over there!

    Best wishes.

  76. Joe,

    Right. If a 10% correction hits, who knows if it’s going to correct more. Trying to guess the market’s next moves is a fool’s errand, and it’s taking on more stress than that which is really necessary or even helpful. Buying high-quality companies at solid values and reinvesting dividends for many years is such a surefire recipe for success that I don’t know why anyone would bother to take on the added stress/risk of market timing. Makes no sense to me, especially when it can’t be done.

    Having no cash to buy when stocks are at a discount is definitely a problem, though I’d argue that I haven’t really run into a situation where no stocks have been priced at a level that made sense over the last five years. If you’re investing, say, $1,000 or $2,000 per month, I doubt you’d run into a scenario where your cash can’t go anywhere. Sure, you might have less cash sitting on the sidelines when bigger discounts come to fruition, but, again, it’s impossible to know when that’ll happen. Meanwhile, the cash flow you’ve built will provide ammo that’s automatically replenishing itself when/if that correction does occur. And you’ll probably have your usual cash for purchases on top of that. The powder should never really be dry unless you suffer some kind personal emergency (job loss, health issues), in which case investing should probably be less of a priority.

    Thanks for dropping by!

    Best wishes.

  77. Great post Jason and thanks for the list. I think it is nearly impossible to predict or even recognize a correction as it is happening. It is even harder to determine the bottom of the correction. So I’m with you, I’m looking forward to a correction but I’m not going to try and time one. I’ll just buy stocks that I think are at the right price. That definitely includes UNP and I’m not sure if it’s down quite 10% but I also like CVX right now.

    Ken

  78. As an index investor who just keeps on buying every month, I’m not really looking for a correction per se. But hey, if it happens, great…wouldn’t mind buying on sale, as you note. 🙂

  79. Hello Jason and fellow dividend lovers! I love this blog and this community in general. I have learned a lot from the blogosphere and have been thinking of starting my own blog this summer.

    I was curious about your thoughts on the oil refinery sector (companies like MPC and PSX). Since their spin-offs from their parent companies (MRO and COP respectively), their stock performances have been pretty solid. However I understand that a company’s short-term stock performance isn’t necessarily indicative of the business’s underlying health, especially over the long term. A simplification of their business models is that the refineries make money on the spread of refining the oil despite the lower oil prices. I know the oil and gas explorers/drillers are more directly hurt by lower prices, but the refiners seem to be resilient to changes in the underlying commodity prices due to their business model.

    Anyways, I know refinery yields have tended to be fairly low, especially MPC, whose yield is currently under 2 but whose dividend growth rate has been around 20-25%/year since its spin-off from MRO in 2011. PSX has had an almost identical dividend performance, but with a div yield currently at 2.90. The payout ratio for MPC sits at just under 20%, which tells me they have plenty of room to grow their dividend payout in the future but are currently using their cash to grow their business. Am I right in this assumption?) PSX’s payout ratio is just around 35% currently, higher than MPC but still worthy of recognition considering its already respectable 2.9% yield.n I’m wondering, despite low payout ratios, if it is likely these companies will continue to raise dividend payouts in the future or if these companies will maintain low payout ratios. MPC’s 5-year forward annual growth rate is expected to be around 8.5% and PSX is around 9%, so even if they maintained their dividend growth rate to be in line with the growth rate, they’d still have room to grow their dividend in excess of their growth rate per year when considering the low payout ratio.

    A few other companies in this sector are VLO and TSO. TSO just recently started paying dividends again in 2012, so they probably don’t fit the “buy and hold forever” criteria, but it is good to look at the competitiors in the industry to see what is out there. VLO sports a low payout ratio of 23% and a current yield of around 2.8%, with solid growth in the past four years. I don’t like VLO simply for the fact that they cut their dividends around the late 2000s. I’d have to review this dividend cut to understand why they cut and make a decision on whether I would want to put money into their stock with the potential for another cut when there are plenty of other companies who are much less likely to cut their dividend.

    I have not done an in-depth analysis of these companies’ financial statements or this market environment, I simply was reviewing some of the dividend metrics. I do think this industry has something going for them – oil probably isn’t going anywhere anytime soon. I do think MPC and PSX are potential candidates to add to the dividend growth portfolio despite appearing to need more track history.

    That’s all for now.

  80. W.P. Carey announced they were going to issue $400 million in additional equity. My question is, will this have an adverse effect on the price of the stock? The word dilution comes to mind. After seeing this it makes me want to take a wait and see attitude. Enjoy your articles, they offer good thoughts on stocks. Good investments will help us to increase our retirement income.

  81. Ken,

    I’m on the same page as you. Looking forward to a correction, but also not trying to time it, predict it, or call the bottom. Not only impossible, but also unnecessary. 🙂

    Best of luck picking through the discounted merchandise over there!

    Cheers.

  82. DB40,

    Buying month in and out is really the way to go. Although even if I were an index investor buying monthly, I’d still look forward to a correction as that would allow me to buy more equity for the same amount of money. Asset accumulators can accumulate more when assets are cheaper. Let’s hope we get that store-wide sale at some point here in the near future. 🙂

    Best regards.

  83. Mike,

    The refiners have a lot to like. I received my PSX shares via the COP spin-off a little while back, so I didn’t intentionally invest there. That said, it’s been a wonderful holding for me.

    I haven’t really followed the refiners particularly closely, though, and that’s because I prefer the integrated companies and the diversification therein. When oil is cheap, the downstream operations help insulate and protect earnings, and then expensive oil means upstream operations are quite profitable.

    From what I’ve seen, PSX is one of the best refiners because of their diversification into midstream and chemicals as well as its international footprint. I suspect the dividend will continue to grow at an attractive rate – the payout ratio is very low, the balance sheet is healthy, and the company continues to sport strong EPS. There’s not a lot of historical data to go off of, however, due to the fact that it hasn’t operated as an independent company for very long. But it’s been a solid performer for me and the shares do appear undervalued here (if future dividend growth is anywhere close to what they’ve generated recently).

    Thanks for the support and readership. Best of luck if you decide to start your own blog. 🙂

    Cheers.

  84. Carl,

    REITs routinely issue shares because of the structure of the business – they don’t retain much net income since they have to pay most of it out in the form of a dividend. That’s why when I analyze REITs, I include per-share growth rather than absolute growth. So your ownership in just about any REIT out there is becoming “diluted” over time.

    That said, the equity typically is used to grow the business and/or pay down debt, as it should be. Acquisitions aren’t funded by magic; they’re usually funded via use of debt and/or issuance of equity. If you look at the financial statements of most REITs, you’ll see the cumulative dilutive effect over time. Realty Income, for instance, has almost tripled its outstanding shares over the last decade. WPC’s shares have more than doubled.

    Best wishes.

  85. I am not waiting for a correction at all. I recently bumped up my monthly WMT purchases through LOYAL3 (from$25 to $150) as I think it is at a good price now. Also investing in OHI right now and have considered adding more PG.

  86. John,

    Not waiting around for a correction is the right way to go. If it comes, all the better. In the meanwhile, there’s some discounted merchandise out there if you look hard enough. 🙂

    Happy shopping!

    Best regards.

  87. I just bought UNP and STX this morning (11 and 12 shares, respectively). STX is down about 20% YTD, but I don’t think their long-term business is compromised. They’re investing in SSD tech and cloud systems. Plus there are only so many hard drive makers (Seagate and Western Digital, really). (And they were down another 3% this morning so I jumped).

    I would also buy WMT, PG, and OHI.

    I also still own RDS.A, which is the dividend share of RDS.B. My holding of that is down 12% (total).

    Thanks,
    WE

  88. WE,

    Gotta go where the value is, right? As long as you think the long-term story is intact and the fundamentals remain strong, a sale should be most welcomed. 🙂

    Keep it rolling over there!

    Cheers.

  89. Hi,

    I’m new to the investment world, so I have to say that all this correction looming news keeps me on the sidelines in fear of jumping in. For the time being I have been Boglehead and sticking to passive index fund investing until I can learn more about valuing companies. I’m almost done with reading The Intelligent Investor and it is a great book. What book would you recommend as my second book for learning more about valuing individual companies. What book helped you the most?

    Thanks for the great website!

  90. You have been practicing a sound approach to buying value stocks for some time. I definitely like your store analogy! :)Warren Buffet is the shining example of buying companies undervalued and independent of where the broad market stands. As a result, he and his shareholders have been richly rewarded.

    I have gone through many corrections – some have cost me dearly based on my approach at the time. Granted they weren’t the best approaches. 🙂 I have become more conservative as a result. In your case you have some years to weather a few more of these corrections.

    You are really applying a hybrid approach of dollar cost averaging (not timing the market) and value buying (evaluating what makes sense to your criteria). The research you are conducting requires patience and should serve you well.

    Over the years I have seen many of my dividend stocks cut their dividends. Looking at your list, those companies have a long track history of maintaining and increasing dividends. Hopefully their dividends will be ok when that correction finally does arrive.

  91. Great article Jason!

    There are definitely undervalued stocks in overvalued market. Search and you shell find!

    I also recently bought OHI, and now I am looking towards PG and UNP:

    Best Regards
    Dividend Freedom

  92. I like the article. That said, I’m still accumulating cash. Still buying a few things here and there – I like XOM. When interest rates start to rise either late this year or 2016 there will be a flight from dividend stocks and I plan to scoop up some real bargains. Unless the fed is bluffing. Or I am wrong.

  93. Hi Jason,

    I’ve stopped waiting for a correction long ago… but would welcome one as I’m still in my early stages of building a nice portfolio and I would love to take advantage of lower valuations as long as I can still have a job (to get money to invest). Unfortunately I work in finance and a market contraction often results in layoffs in my field. I kept my job in 2008 but who knows if it’s going to be the case next time.

    The biggest threat to economy right now seems to be related to low interest rates and expectations that they will be raised soon. Higher interest rates means less borrowers means they don’t need me as much. So as much as I would welcome a correction for buying opportunities, these huge corrections always come at a price… nothing is free in this world!

    It’s cool to see stocks on sale but only if you have money to buy them!

    That was a very good post by the way.

  94. Gilberto,

    You’ve read the greatest book on investing out there, in my opinion. I don’t think it gets any better than The Intelligent Investor.

    Valuing individual companies is something that I’ve just learned over time. I don’t think I can point to any one book and say that I learned everything from it. That said, I’ve included just about every book I’ve ever read on investing over on my Getting Started page. I think there’s a lot to be learned in just looking at financial statements and running through the numbers.

    You can also check out this post I wrote a while back on analyzing and valuing stocks:

    https://www.dividendmantra.com/2014/01/how-i-analyze-and-value-stocks/

    I’d probably be able to convey the subject much better if I were to rewrite that article, but it still holds merit to this day.

    Hope that helps!

    Cheers.

  95. Bryan,

    “You are really applying a hybrid approach of dollar cost averaging (not timing the market) and value buying (evaluating what makes sense to your criteria).”

    Exactly. I think if you focus on high-quality dividend growth stocks and then insist on prudently buying when a margin of safety is present, you’ll do well. Averaging your way into the market means you’re somewhat immune to Mr. Market’s mood swings. Combining the two concepts should result in impressive wealth and growing income generation, which I hope to show over the years.

    Thanks for all the support. Let’s not let the market bully us around. 🙂

    Cheers!

  96. DF,

    Indeed! Ignore the expensive merchandise draped over the mannequins and head back to the clearance section. Cheaper merchandise (relative to value) can be found. 🙂

    Happy shopping over there!

    Take care.

  97. dzogen,

    I certainly hope you’re right about that – I’d love to see cheaper dividend growth stocks. It wouldn’t shock me to see a 10% correction tomorrow. Of course, it also wouldn’t surprise me to see one happen late this year or sometime next year. Can’t really predict it so I’ll just continue to accumulate high-quality assets at solid values and add to the cash flow. 🙂

    Cheers!

  98. Allan,

    Thanks so much. Hope you enjoyed it!

    Yeah, I’m not real concerned about rising rates. I suppose I would be if I were you and it somehow might affect my employment. But as an investor, I’m just not worried about it. The majority of the businesses I own a stake in have been operating for a long time now, many of them during periods of much higher rates.

    Certainly hope nothing happens to the job over there for you. Definitely need that paycheck to keep buying your way out of the rat race. 🙂

    Best regards.

  99. I think there are many great values right now. I used some of my saved capital to make a purchase today that pushed my yearly dividends over $1000 while others are screaming “sell!” 🙂

  100. Daniel,

    Awesome work! Congrats. 🙂

    Focus on the rising dividend income and the actual value (not market price) of the equity in the companies you own and I’m sure you’ll continue to do well and push that dividend income ever higher.

    Best regards.

  101. Great article. I bought some BBL recently and looking to add some. What’s your thought on it at this time? Thanks

  102. Harry,

    My thoughts on BBL haven’t really changed since I last analyzed it:

    https://www.dividendmantra.com/2014/10/recent-buy-43/

    What’s happened since then is that the spin-off of SOUHY has occurred, so I’d value the business slightly less because of that. In addition, they released FY 2015 interim results back in February:

    http://www.bhpbilliton.com/home/investors/reports/Documents/2015/150224_BHPBillitonInterimResultsFY15Presentation.pdf

    The results were pretty solid, in my view. Cash flow was strong, the dividend is still covered with ample room, debt is down, and overall results weren’t hit all that hard considering the circumstances.

    Cheers!

  103. Jason,

    Have you written any articles about novice investors just starting out and how they might begin a dividend growth investment strategy? As a novice investor myself with no proven experience in accurately valuing stocks, how can I feel confident about making individual stock purchases. Research (as well as Warren Buffett) seems to indicate that simply buying low cost broad market index funds (i.e. vanguard VTSAX) is a safer bet for the “average Joe” investor. Thanks.

  104. Chris,

    I’ve written a few articles on that over the years, though the blog itself is kind of a learning tool as you can follow along right from the beginning where I was a pretty fresh investor.

    But you may find value in these articles:

    https://www.dividendmantra.com/2014/05/if-i-were-starting-all-over-again/

    https://www.dividendmantra.com/2014/01/how-i-analyze-and-value-stocks/

    And I would strongly recommend reading the books I’ve listed here:

    https://www.dividendmantra.com/getting-started/

    That all said, investing in individual stocks isn’t for everyone for a variety of reasons. For those people, buying a few low-cost index funds would be better. You’ll really have to decide that for yourself after considering all of your options and the pros and cons therein.

    Hope that helps! 🙂

    Best regards.

  105. Hi Jason,
    Great article and I wholeheartedly agree. Indeed it is a market of stocks!!! I would also welcome seeing the DJI at 10% less and view it as healthy. But still, as you affirm, that’s not the point when it comes to shopping. Some of the REITS have already dropped in anticipation of interest rate hikes. OHI and WPC are on my buy list. I really like Realty Income Corp ( symbol O ). What are you thoughts on “O” . Best regards, Dan

  106. Dan,

    Thanks so much. Glad you enjoyed it and found some value in it. 🙂

    O’s a great stock. One of my favorite REITs. The valuation at around 17.5 times AFFO is quite a bit higher than the other REITs I’m looking at right now, while the yield is also quite a bit lower. I think some premium is warranted, though, due to the track record and quality. But I think there are better deals in the REIT space.

    Thanks for stopping in!

    Best wishes.

  107. Hey,
    Looking at some of your Discounted Merchandise section has WMT jumping off my watch list. I think we can both agree Walmart isn’t going anywhere. Going to be initiating some WMT purchases soon and hope the stock stays low and discounted for the remainder of the summer. WMT may be an excellent stock to sell options on depending if you want to get in at a lower price point (sell put) or want to take advantage of the slide (while holding) by selling calls.
    -Rich

  108. Great article and good history. Absolutely agree that the most appropriate way to look at investing is as though you’re buying a gallon of gas. As prices decline, folks get excited, they rarely lament the fact that they “overpaid” for what’s already in the tank. For all future purchases, the same dollar figure buys you more miles on the road.

  109. Rich,

    I definitely can’t see WMT going anywhere anytime soon. Retailing is filled with stories of once major players that have over time shrunk in size or gone totally bankrupt, but I don’t think we’ve ever seen anything like WMT before in history. E-commerce is certainly their biggest threat, but they’re doing well holding their own with growing online sales. Seems like a pretty solid idea here at 15 times earnings.

    Thanks for dropping by!

    Cheers.

  110. Retire29,

    Yeah, that’s right along the lines of the Buffett quote about rejoicing for the rising price of gas simply because your tank contains a day’s supply. Funny how people react to falling prices in stocks differently from just about anything else out there. I’ve never seen people get upset when the price of food, clothing, or energy drops. Yet even though cheaper stocks means more income/shares for the same amount of money, they hate seeing it happen. And I think that’s really a good example as to why a lot of people aren’t particularly good at investing over long periods of time. But I’ll buy what others are selling and we’ll see who comes out ahead. 🙂

    Best regards.

  111. It’s always a difficult task trying to differentiate between a healthy pull back, a correction and a straight up market route. In this case, there’s a nice solid trend line we can use – any pull back below that rising trend line is likely to trigger some serious panick as we will see more than a correction IMO.

    Figuring out when to buy on pullbacks etc is another tough thing to try and figure out. I generally adopt a “pyramid in” approach whereby I buy a small parcel when I think a bottom is near and then progressively add to my holding as it moves in either direction (unless of course further significant weakness arises). Means I don’t get the absolute best/worst entry, but it’s a lot safer and lets be honest – no one ever is able to pick bottoms and tops with any accuracy.

    Works for me anyway.

  112. “Funny how people react to falling prices in stocks differently from just about anything else out there” – I think that’s generally because people aren’t going to eventually on-sell their food or gas. Stocks on the other hand are eventually going to be sold back into the market therefore people panic at the sight of their brokerage account losing significant paper value.

  113. Sam,

    Yeah, I think it’s really impossible to tell the difference between a pullback and, say, the next bear market. If it were possible, people would be doing it routinely and there’d be a lot of people with their own private islands. Of course, you wouldn’t then have the major snap backs in the first place if that were the case, which makes it a catch-22.

    That approach sounds sound, though. I just average my way in through all market conditions. Even if timing were somehow possible, it’s not necessary to achieve great long-term success. The problem is you might “think a bottom is near” after things drop 15% and quickly come back in 5% or so… and then deploy more cash. And then maybe it drops another 10% from there. You can’t really tell. What happens on Monday doesn’t seem to have any correlation to what happens on Tuesday. Just part of the deal, but, like I said, it’s not really a problem if you’re investing for the long term and ignoring the noise.

    Cheers!

  114. Sam,

    Right. Good point. Though, that would only apply to those that aren’t actively accumulating assets anymore and instead living off of selling their assets. Unfortunately, that doesn’t seem to work out in the real world. Most people will/should be accumulating assets for a far longer period of time than they’ll be selling, but those still in accumulation mode bemoan major pullbacks anyway. Anyone actively accumulating assets (the vast majority of people stopping by this site, myself, and most investors in general from what I can tell) should definitely look forward to cheaper stocks relative to their respective values.

    Best regards.

  115. Hey Jason,

    I have not been waiting for a correction. I have about 20 stocks on my watch list and I just pulled the trigger on CM.
    It is a Canadian bank, probably the most attractively valued, right now. I purchased on the TSX, as I am in Canada, but if I accumulate enough US$ from my NYSE holdings, I would think about buying there……just not enough US capital at this time.

    I plan to own all five big Canadian banks (BNS, RY, CM, TD and BMO) to stay diversified. Although, even though they are based in Canada, they operate huge segments in the US and Latin America (especially TD, RY and BNS)…just as many large American companies operate outside of the USA. I find this to be very good insulator, not reliant on only one countries economy.

    The banks do have some blips along the way, but none of the big five cut dividends during the Great Recession, they merely held off increases for 2 or so years and then carried on as normal. (Heck some of them paid dividends during 2 world wars and the Great Depression)

    I am not against US financials, I own TROW and several other great US companies, but the US banks have not earned my trust, and I am happy to be more conservative with the Cdn banks.

    This is what I have been doing this for several of the banks here in Canada. I keep some capital hanging around, ready to go. When one of the big five banks becomes under valued, I jump on it without hesitation. I am not waiting for a market wide correction, that could be 10 years from now (or tomorrow), for all we know.

    I just cant believe the P/E ratios are so low for the Canadian Banks, around the 10 mark. Can anyone explain why these banks show such low P/E ratios lately? They typically are lower than the broad market average….

    Love the insight, this community really helps keep me motivated to achieve early financial independence.

    Take care.

    DS

  116. I have been buying a lot of RDS and just made a small purchase of WMT today. This is the first time I’ve purchased WMT in 3 yrs.

  117. DS,

    Yeah, the Canadian banks have a great legacy, especially in regards to dividends. Gotta love dividend payments since the early 1800s. 🙂

    The Canadian banking industry is less fragmented and more competitively rational than what we have here in the US. Of course, it’s really comparing apples to oranges since the entire country of Canada has less people in it than just the state of California. Nonetheless, there’s a lot to like there, which is why I’m glad to own a slice of BNS and TD.

    As far as low P/E ratios, not all industries are the same. Banks have historically sported lower P/E ratios because of perceived risk. So that’s just something to be mindful of when looking at those stocks.

    Thanks for sharing!

    Take care.

  118. DD,

    Great choice there. WMT makes a lot more sense right now than it has in quite a while. I don’t know who was buying it at $90/share earlier in the year, but it seems like a good long-term bet here at around 15 times earnings. I’m looking at it once more for the first time in a long time. Not a real big fan of retailers in general, but WMT has massive competitive advantages.

    Cheers!

  119. Another very good post Jason! I couldn’t agree more. The market seems overvalued, but we have to look at stocks individually to judge their fair value… or not. Even then, I know all investor has it’s own tolerance to what they consider “expensive” or not when it comes to stocks.

    Glad to see WMT in your list too. I continue to be in love with the stock… although I don’t necessarily like its market! 😉

    Cheers,

    Mike

  120. Mike,

    Right. One really has to think of the stock market as one big store with a lot of stocks for sale. Some will be expensive; other stocks will be cheap. And that’s all relative to value, which is in large part subjective.

    But WMT does appear pretty solid. I’m actually considering adding to it for the first time in a while. Not super excited about retailers in general, but it’s tough to ignore the 800-pound gorilla.

    Cheers!

  121. Hey Jason,

    I haven’t really evaluated the Canadian Banks based on number of people in the country of Canada. Because the CDN banks operate so heavily in the US and provide services to many US and CDN businesses and regular, everyday people.
    Same as I don’t value KO and JNJ based on number of people in the US, they provide service in many other places. I understand KO and JNJ are global, whereas CDN banks are not, however, the CDN banks service many global businesses and clients, thereby, indirectly operate globally.

    I prefer to look at the US market cap and if you look at the NYSE listings for RY, they are half the size of KO at $92 billion US…..different business, but still impressive. BNS is $65 billion US (more that CL Colgate Palmolive)

    A different perspective, but regardless, I am glad to read about others not waiting on the sidelines for a correction!
    Lets put that capital to work

  122. Duane,

    I wasn’t saying you should evaluate the Canadian banks based on the population of the country. You’ll notice I never include the population of countries that the companies I buy are based in. Rather, I was saying that the Canadian market is somewhat limited to competition, thus allowing a rational competitive market. Just like there’s only room for so many major, multinational banks in, say, a state here in the US, there’s also only so much room for global banks in Canada. Of course, it also changes the dynamics quite a bit. Really just a different regulatory and financial position up there.

    “I understand KO and JNJ are global, whereas CDN banks are not…”

    Not so sure about that. BNS, for instance, is incredibly global. They have assets all over the world. Though, some of the big banks up there are more domestic than others. And BNS is the most international of them all, which is one reason I like them.

    That said, the current Canadian economy as it relates to housing and indebtedness reminds me a bit of what the US had before the housing crisis. So that’s just a risk to be aware of. Our market corrected rather harshly. The Canadian market never did. But, again, apples to oranges somewhat.

    Cheers!

  123. Great post DM. Its pretty hard to intentionally ‘time’ the market to a T. I said the same things pretty much in my recent buy post, where they REIT has since declined about $1.50 and had i waited I could have bought another full share. But, you never know right? I’m just happy to be taking in the extra income every month from now on 🙂

  124. DW,

    Exactly. If the market could be reliably and regularly timed, people would be doing it. But it’s complete guesswork. A flip of the coin. Fortunately, we don’t need to worry about it as long-term investors. 🙂

    Enjoy that extra dividend income every month. Focusing on the income and growth of the income totally takes the focus away from the day-to-day fluctuations, which is how it should be.

    Keep it up!

    Cheers.

  125. DD,

    Nice moves over there. I’m all stocked up on NOV, but WMT is one I’m looking at for the first time in a long time. May add a little this month or next. It’ll just depend on funds and other opportunities.

    Keep it up!

    Best wishes.

  126. Correction is long term investors best buddy !
    Over here , the market is down about 10-12% in a couple of months. Some quality stocks are down 30-50% ! And I tell you , my mouth is just watering ! Nothing gives me more joy than being able to buy the stock at “my price” . Happy Investing !!!

  127. harsh,

    I’m with you 100%. My mouth has been watering quite a bit lately and I haven’t even had that 10% broader market decline. I’d be very, very excited to see all stocks across the board drop rather significantly from here.

    Take advantage of those opportunities over there. And have fun! 🙂

    Cheers.

  128. Good stuff. I’ve been really busy lately and haven’t really been tracking stock movements as closely as I would like. But it looks like quite a few quality companies have dipped into buying range, and the cash has mostly been piling up, and the LO deal just went through…

    Fill out my position in PG, PM or BAX? Average down on XOM or CVX? Start a new position in HSY or TROW? Don’t know yet. The good part is it probably doesn’t matter which ones I end up buying next week and which ones have to wait a little longer; they’re all great companies that should do well in the long run.

  129. Justin,

    Yeah, I’m currently considering where to go with that LO cash. Worse problems to have than too much capital, right? 🙂

    But you’re definitely right in that when we’re talking about high-quality dividend growth stocks, it’s pretty tough to go wrong since they’ll likely do quite well in aggregate over the long term.

    Have fun with the shopping!

    Best wishes.

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