Investors should avoid "emotions" and instead focus on long-term, periodic accumulation, advises Chuck Carlson. Here, the editor of DRIP Investor explains his strategy and highlights a trio of "easy holds" for long-term investors.
Steve Halpern: Joining us today is incoming dividend expert Chuck Carlson, editor of DRIP Investor. How are you doing today, Chuck?
Chuck Carlson: I’m fine, Steve. How are you?
Steve Halpern: Very good. Thanks for joining us. Now, you’re a leading proponent of dividend reinvestment programs, a strategy that forces investors to continually add to their positions, despite market volatility. You point out in your latest research that a big benefit of this strategy is that it eliminates emotions from the investing equation. Could you expand on that?
Chuck Carlson: Sure. As most investors know, typically, it’s hard to separate the emotional side of the human being with, kind of, the intellectual side, and this really hits hard in investments. Typically, in investing, emotions won’t make you do exactly the opposite of what you should be doing if you’re a long-term investor.
For example, as markets decline, as they did in 2008-2009, logically, market declines—especially as severe as we had—reduce stocks to pretty attractive levels if you’re a long-term investor. Unfortunately, most people do exactly the opposite. They don’t buy at that time, and, in fact, they sell.
That’s why dividend reinvestment plans, I think, one of the real values of those is that they strip emotion from the process, and they literally force you to be buying stock at times when your emotions would not let you.
And ultimately, as any long-term investor can tell you, the way you can really build wealth over time is taking advantages of those declines in the market to buy stocks, because stocks typically recover and we’ve seen recovery, pretty much, always, since the early 1900s.
What dividend reinvestment plans do is basically reinforce that ability of getting you into the market to buy stocks during market periods when you’re unlikely to do that on your own volition.
Steve Halpern: With the dividend reinvestment program, you would continue to add to those positions if the market is going up, as well as when it’s going down.
Chuck Carlson: Exactly! I mean, you’re putting money into the market on a regular basis, and yeah, on a short-term basis, some of the money you put in may appear to be at “a market peak,” but again, as you look over time, what you’re doing, basically, is taking advantage of the market’s long-term upward trend.
Most people get so focused on short-term market trends, they really, kind of, miss the forest for the trees, and the reality is, if you go back since 1926, basically, two-thirds of the years, two out of every three years, the market is up.
The way you take advantage of that upward market is putting money into the market on a regular basis and especially putting it in when the market does lose periodic pullbacks.
Steve Halpern: To focus on this type of long-term accumulation strategy, you prefer stocks that you consider all weather stocks, in fact, your latest research report is called “easy holds.” How do you go about finding stocks that meet that criteria?
|pagebreak|Chuck Carlson: We have a variety of ways we do that. One is, kind of, a volatility scoring system that our firm has developed that looks at how stocks historically have behaved during volatile market periods, and then assigning a score to them.
Secondly, we look for companies that, in addition to having kind of a shown lower volatility over the years, that have pretty strong market positions, and, if you will, pretty strong modes in their business, in terms of protecting other competitors, and protecting their profit margins, etc.
So, those are the types of stocks that, typically, will emerge as “easy holds,” good, solid, high-quality, high-brand type products that typically will do well, even when markets are a little soft, and not do as poorly on down market. We have a way to analyze those companies, and that was one of the things we discussed in our recent research report.
Steve Halpern: Let’s look at some of the stocks that meet your criteria as easy hold buys, and one of those is Disney (DIS). What’s the attraction there?
Chuck Carlson: Just very strong brands, broad exposure in a variety of areas that I think have really discernible, long-term growth trends.
You’re looking at broadcasting. I mean, Disney dominates in that space with its ABC network, but more importantly, its ESPN sports programming. It’s a major player in the leisure and travel industry with its theme parks.
It’s a major player in media with its movie operations. It just brings together a lot of very good markets, and it does it with a very strong brand name that should continue over the long-term to be a dominant player in this market.
Steve Halpern: Now, another company that you consider an easy hold is one that some people may not be familiar with. It’s called UGI (UGI). Could you tell us about this firm.
Chuck Carlson: Yes! UGI is a utility company, primarily natural gas. They’re also involved in propane. Utility stocks overall have some defensive characteristics. They typically do hold up better during down markets. UGI, we believe, is one of the better plays in that space.
The stock scores extremely well on our company’s quadric stock rating system in addition to having a good score in terms of a low risk score in our volatility score. For investors out there that are looking for income that want kind of an easy hold stock, UGI meets that need very well.
Steve Halpern: Now, finally, you’re a fan of Union Pacific (UNP), the railroad company. What makes that stock an easy hold candidate?
Chuck Carlson: Well, for starters, I think every portfolio should have some exposure to the transportation area, and Union Pacific provides a nice way to gain exposure to transportation stocks. It’s one of the leading players in the railroad sector. Demand for railroad services continues to be quite strong.
The stock scores quite well on our company’s quadric stock rating system, and then, finally, you get a dividend stream that is decent and should continue to rise.
All in all, when you look at that package, plus, it’s historically not as volatile as the broad market, it’s a stock that we like quite a bit for easy hold investors, and again, that type of high-quality blue-chip name that makes it easy to hold on to that stock for the long-term.
Steve Halpern: Well, we appreciate you taking the time. Thank you for joining us today.
Chuck Carlson: Thank you.
