“A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”. Warren Buffet
In this month’s reflection section, we looked at the intersection of expected return and an investor’s ability to handle market volatility. Some investors have objectives such as generating monthly income. This skews their portfolio toward stocks with above average dividend yields. This means they are likely to miss out on some growth stocks or commodity-based stocks. Both growth stocks and commodity stocks can be more volatile than dividend-oriented stocks. You give up potentially higher returns but gain lower volatility and higher income. Other investors do not like to see a decline in their portfolios, no matter how short-term. When they get their statement, it tells them they have lost money. The key point to consider is whether the portfolio is down because the companies in the portfolio have a problem or is it just there is a temporary price decline where a good business is under priced. If you are saving for years ahead then a few weak months may not have any impact on the value of your portfolio when you need the funds years later.
We continue to focus on purchasing companies with, what we believe to be solid long-term prospects. We tend to prefer dividend paying stocks that continue to pay income despite the market fluctuations. The past year of rising interest rates has put pressure on the price of many dividend paying stocks such as the banks and pipeline companies. One factor we like is not just the yield, but the potential for the company to increase its dividend over time. Over the past year we have seen the beaten-up banks and pipelines increase their dividends. This gives us confidence in the long-term investment returns on these stocks.
