I am a dividend investor with a general bias toward value-oriented stocks. My approach isn’t reliant on the market’s direction. Many investors, however, get enthralled by the bull and bear cycles of the broader market, linking their investment activities to these big trends.
But it doesn’t matter when the market will recover or when it will falter again. Here’s what you should be focusing on instead.
Do I own the right stocks?
Wall Street isn’t some monolithic entity; it is a huge collection of individual stocks owned by individual investors. Even when the market is going up, running like a bull, there will be stocks that are going down. And when the market is going down, being gored by a bear, there will be stocks that are performing well.
If you focus all of your attention on the big picture, you’ll miss all of the activity — and potential opportunity — underneath.
So your most important question isn’t when will the market recover or decline, it is whether or not you own the right stocks for you. In my case, I prefer stocks that have paid dividends reliably for many years, normally highlighted by a long history of annual increases. And I like to buy such stocks when their dividend yields are historically high. Broadly speaking, I have a value bias: I’m really looking for what could be called “fallen angels,” or well-run companies temporarily going through hard times.
There are times when it is hard to find investment candidates, for sure, but in those situations, I just sit on cash. As an individual investor, there’s nobody looking over my shoulder judging me, and there’s no mandate that I have to be fully invested. But even when there are few options, I am still able to find stocks that are potential investment candidates.
A couple of examples
I bought Nucor (NYSE: NUE) and Eaton (NYSE: ETN) in late 2015. The former was an out-of-favor steel company, and the latter was an out-of-favor industrial. Both were lagging the broader market by a wide margin at the time, but they had strong dividend histories and well-run businesses. Their dividend yields were historically high, suggesting both stocks were relatively cheap.
Since late 2015, both stocks have recovered quite nicely, and their yields have been compressed despite regular annual dividend increases along the way.
That’s cherry picking; I certainly have made mistakes. But you can find opportunity in just about any sector of the market if you are looking. A couple of my current investments underscore this.
Medtronic (NYSE: MDT) and Texas Instruments (NASDAQ: TXN) are both unloved today, and have historically high yields, suggesting they are on sale. Both have long histories of paying reliable dividends backed by strong businesses. Medtronic, a medical device specialist, has some company-specific headwinds — chiefly product delays — holding it down. Texas Instruments is facing a chip industry downturn. These are likely to be temporary problems.
All of these stocks fit my style of investing, and buying them had nothing to do with broader market gyrations. In fact, if the only reason you buy a stock is because of the direction of the market, then you’ll be in a constant state of flux with your portfolio.
Trying to run with the prevailing trends might work for some investors. But for me (and I think most others), there are other things in life to focus on. I’m much more comfortable buying a great company and sitting with it for years on end, collecting my quarterly dividend checks. At the core, that is what Warren Buffett has done with companies like Coca-Cola and American Express.
You do you, not the market
As investors, we have to recognize that we are our own worst enemies. One very frequent problem is that investors pay undue attention to the direction of the market.
Don’t worry when the next upturn or downturn is going to occur, worry that what you own makes sense for your investment approach. If you do that, the broader market won’t be such a big deal anymore.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has positions in Eaton Plc, Medtronic, Nucor, and Texas Instruments. The Motley Fool has positions in and recommends Texas Instruments. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.