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In my Monthly review for March, I committed to writing about shares that I was considering to buy.
This is to help me slow down and make sure I do my due diligence before investing in any companies.
Right now, we are in uncertain times. Most people I know are either working from home or have been temporarily laid off. I technically fit into both categories.
For my engineering job I am currently working from home but my bricks and mortar Cafe has had to close down.
The problem with closing down is that we just don’t know when we can open again.
If we feel uncertain as a small business than I am sure there are literally thousands more that feel like us.
IS YOUR STOCK PORTFOLIO STRATEGY WORKING?
Recently I read an Article from the the Sunday Investor who asked this very question. Is it worth the time and effort of picking individual shares or would you be better investing in a ETF or two?
https://www.buymeacoffee.com/dividendtalk
Hands up, I never really checked this before. so i did not know the answer to this question. But my interest was peaked.
Being from Ireland the laws on ETF’s are quite complex and the Tax is different depending on factors such as where the ETF is domiciled and if they pay dividends or not.
We also have this deemed disposal rule where we have to pretend to sell our ETF’s every 8 years (even if we don’t) and pay tax on any gain. So I always just dismissed ETF’s but it would be good to know if my strategy is actually working.
The Sunday Investor was kind enough to share his template with me, in fact went one step further to customise it to my portfolio. I am still working through the template and will write a detailed report of my findings on my own portfolio over the coming days but it has got me thinking about asset allocation.
Essential Sectors
While thinking about asset allocation, I found myself wondering which sectors would perform more favourably during a downturn.
The answer was inadvertently supplied to me by The Sunday Investor when he sent me on his template. Below are the the YTD returns from ETF Benchmarks for each sector in my portfolio.
The four Sectors highlighted in Green, Consumer Stables, Health Care, IT and Utilities have been the four best sectors during uncertain times this year. Certainly when you quickly google historical data it points you to the Consumer stables, Health Care and Utilities so this seems like a reasonable place to start.
BTW if any knows a good resource to compare each sector over the years could you please let me know. Lots of people have wrote about it, but I have seen very little data to back it up so far.
I Don’t Like Debt
Personally I do not like any debt. I spent most of my teens and most of my 20s in debt and had to work super hard to get myself out of debt.
With that in mind, during these times my preference needs to with companies with the same mindset. We have seen alot of companies over the last few weeks beginning to cut dividends and the ones that I feel would be more at risk are the ones with a high amount of debt.
Remember my focus is on solid dividend paying stocks. Companies that are focused on constantly growing their dividends. I will also be focusing on Companies with a low Debt/Equity Ratio.
Process to Pick Defensive Stocks to Review
1 – Download Dividend Champions spreadsheet from Dripinvesting.org
2 – Filter out companies with low debt in the debt/equity column ‘AN’. I have chosen a Debt/Equity of 0.7 as my filter. This means that the company has 70 cent debt for every dollar it earns. To do this, I simply highlight all the cells in that Column from row A6 and sort from lowest to Highest. I than Delete the rows that have a Debt/Equity ratio higher than 0.7
3 – Filter out the sectors that are not Consumer Staples, Health Care or Utilities from column C
4 – Filter out companies who have a 10 -yr DGR of less than 7. (JNJ were at 6.9 so they just about made the cut)
5 – Filter out any companies who have not increased dividends through the last 2 Recessions.
6 – This left me with a shortlist of 5 Companies to consider to buy at the end of the month. 3 Companies are from the Consumer Staples Sector and 2 from the Health Care Sector
What do you think of this list? Do you own any of these companies are are you thinking of buying them in the future? Let me know in the comments below.
I still have a couple of weeks before I will be in a position to add to my portfolio but I have plenty to think about and research before than!
Thanks for Reading and Happy Investing!
Derek,
Thanks for the mention – you didn’t have to do that of course, but I appreciate it. We can all learn from each other, and your post has reminded me of something I hadn’t wrote about too much yet and that is the importance of debt.
Your debt/equity ratio of 0.7 seems reasonable – arbitrary of course, but reasonable. But I’m saying it’s arbitrary because it ignores credit ratings. Johnson and Johnson, for example, is a bit high (on average) of the five stocks you’ve shortlisted but your analysis ignores their AAA credit rating. They aren’t going to have a problem meeting their debt obligations, and as my friend the actuary pointed out to me before, you can learn a lot from reading credit rating reports if you can get your hands on them. Even just Googling “JNJ credit rating” can give you the rating and get a brief snippet of it without having to pay for the full report from a rating agency like Moody’s.
The point is, you should judge your debt/equity ratio in the context of the company’s credit rating. After all, think of the whole reason people invest in high yield / junk bond funds. It’s because they are by definition, below investment grade and therefore offer the opportunity for higher returns – that is, if the company manages to make its coupon and principal payments. That’s the return you earn for the risk you take, and it may not work out. If the D/E of JNJ happened to be above 0.7, would your screener exclude them simply on that metric alone? If so you may have a problem.
Speaking of high-yield junk bonds, I have an interesting chart in one of my old Finance textbooks showing the default rates of high-yield (i.e. below investment grade) bonds with the economic cycles in Canada. I suspect the U.S. is similar, but the correlation between high default rates and recessions is almost perfect. These bonds are the first to go during slowdowns. For fun I checked out PH&N high yield bond and not surprisingly, the fund is now open for new purchases (after being exclusive and closed off for a while). The reason? Too many unitholders sold their positions recently and now they don’t have enough assets to justify the fund costs so they need more investors!
At the same time there’s nothing wrong with setting some conditions for your portfolio. But be careful that it doesn’t become too restrictive – you may be inadvertently screening out some good companies. At the end of the day, with whatever investment you choose, see if you can find information about their credit rating – if it’s good, then that’s one thing less you have to worry about.
Thanks again for the mention!