With the advent of index investing, there’s been a huge increase in so-called “passive investors.” That’s not a bad thing, as most people should spend more time focused on saving money and leave the investing piece to others. For those of us who actually enjoy actively buying and selling individual stocks, however, there’s always this nagging feeling that there’s something we could be doing.
I, for one, am always on the lookout for a good dividend investment even when I don’t have any free cash to put to work. Today, however, I’m channeling my inner Winnie the Pooh and focusing on doing nothing with my investments in 3M (MMM 2.34%) and Dominion Energy (D 2.19%), and with Omega Healthcare (OHI 0.65%), a stock I’ve been tracking with interest for a couple of years. Here’s why.
The logic of Pooh
Winnie the Pooh is known for many things, including two great quotes of his (or more accurately his creator A.A. Milne) regarding doing nothing: “Doing nothing often leads to the very best of something”; and “Don’t underestimate the value of doing nothing … .” When it comes to investing, people tend to focus on doing things, like buying and selling stocks, and yet doing nothing at all is a valid focus as well. In fact, there’s a mutual fund, today known as Voya Corporate Leaders Trust, that Pooh would love. Over the past 20 years, it’s outperformed the broader market. The chart below, comparing the SPDR S&P 500 Index Trust to Voya, makes this clear.
Voya Corporate Leaders Trust’s objective is explained as “The Fund seeks long-term capital growth and income through investment generally in a uniform number of shares of common stock of a fixed list of American blue-chip corporations.” In plain English, the fund bought a set list of stocks when it was created in 1935 and basically hasn’t done a single thing with the portfolio since that point in time.
Doing nothing isn’t always a bad thing. Sometimes, it might actually lead to better outcomes than making emotionally rash decisions in the heat of the moment. Right now, I’m listening to Pooh and doing nothing with two stocks I own and one that I’ve long considered owning.
1. 3M: Legal and regulatory headaches
I’m deeply underwater with my investment in 3M. The big problem here is a mixture of middling business performance and legal and regulatory headwinds. The company has a long history of innovation behind it and continues to spend materially on research and development, so I believe it will find a way to speed up its growth rate in time. That said, product-liability lawsuits regarding earplugs sold to the military, and regulatory and legal issues surrounding forever chemicals are open-ended problems that will not be easy to solve and involve a great deal of uncertainty. Given the list of large companies that have successfully survived such problems, it seems highly likely to me that 3M will muddle through these issues in one piece.
But there are material changes taking place. For example, 3M is spinning off its healthcare division, which was supposed to be a growth engine. That, I suspect, will lead to a dividend reduction at 3M given the size of the healthcare division. I am thinking about harvesting the losses here and giving myself a 30-day breather to consider if I want to buy it again. I don’t think there’s a quick solution to the problems, so waiting isn’t likely to impact me one way or the other. And the longer I wait, the more information I have about the spin-off, which is the near-term change I’m most interested in learning about. Once I know more about the impact that might have on me, I’ll reconsider my decision to do nothing.
2. Dominion Energy: Slimming down, again
Dominion Energy has been reducing the scope of its business for decades, going from a highly diversified energy company (including oil production) to a simple, regulated utility. In 2022 it announced that it was, once again, reviewing its operations with the goal of simplifying its business. I like the company’s regulated utility operations, but I don’t like that constant change. More specifically, after the last big business overhaul, when it sold most of its pipeline operations to Berkshire Hathaway, management promised a steadily growing dividend. It has now reneged on that promise, just three years later!
I’m not pleased and feel less confident in management, but I also know that the vast majority of the company is tied to regulated utility assets. So there’s a very solid foundation. I would like to replace Dominion, but I don’t want to rush into the decision. There’s really no need; the business is only going to change at the margins. And if I’m wrong about that, pending the business review, I’ll dump it like a rock. But if the change is relatively small, I’m happy to wait until I find a utility I am excited about buying. The next update on the overhaul will come with first-quarter earnings.
3. Omega Healthcare: The troubles keep coming
I’ve been watching nursing home real estate investment trust (REIT) Omega Healthcare for years. It always has a high yield because nursing homes are generally considered to be higher risk than other types of healthcare real estate. That said, during the COVID-19 pandemic, nursing homes were, and continue to be, under significant pressure. Omega has been dealing with a near-constant string of tenant problems and, from my perspective, operating from a position of weakness.
Buying when other investors are pessimistic can lead to strong returns. But sometimes the pessimism is justified. Notably, Omega’s dividend yield, at around 9.9%, is high but not actually out of range historically speaking. My takeaway has been that investors see the stock as risky but not any more risky than it has been in the past. I’m interested, but I’m more than a little concerned that the coronavirus pandemic is actually worse than the past environments Omega has navigated. It is doing a fine job, but I want to see the tenant problems abate before I jump in. And if I miss my chance, well, I’m certain there will be other investment opportunities to pick from.
You don’t have to do anything
One of the biggest benefits that individual investors have is that there is nobody sitting over your shoulder watching your day-to-day performance. It means you can play the long game, holding on to losers if you think they can turn things around, waiting to change out a stock until you find the right replacement, and simply watching a potentially attractive investment candidate until you are comfortable buying it. Clearly, if something material changes with a stock, you should make warranted changes. But don’t ignore Pooh’s advice: Sometimes the best things come out of just doing nothing.