At the outset of the New Year your investment thinking should be focused on discerning the best themes and sectors that present the most promising prospects for the next several years. This is a critical aspect of proper investing. Upon identifying and deciding on these areas, your stock holdings that represent a particular sector should carry ample dividend yields. In my book, Full of Bull, the second most important investment strategy, after preserving capital, is to invest in the most favorable themes and industry sectors. There is no better time to ponder and formulate conclusions on such long-term trends than at the beginning of a new decade.
The way to take long rides on stellar performers and realize overall investment returns superior to the market is to be invested in an industry sector that is emerging or is expected to achieve healthy growth and profitability on a fairly consistent basis for years to come. Identify areas where business prospects are shifting positive or where circumstances are already in place and resulting in robust business that is sustainable long-term. Look for sectors that are underinvested and underexploited. Figure out the favorable theme. But be cautious of fashionable trends or fads. Sometimes they might be narrower, more mature, or already fully exploited by investors.
Andy Kessler, a prominent author and former hedge fund manager, mentions in the Wall Street Journal that you should “figure out where productivity and therefore wealth is being created in the economy, and invest alongside it.” He characterizes it as “focusing on the next mountain to be climbed, and not the foothills directly in front of us,” referring to areas such as “wireless commerce, gigabyte broadband, personalized prescription drugs, oil shale extraction, and electric grids to better allocate power.” I detailed in a mid-November blog one of Warren Buffett’s major themes for the future, long haul railroad bulk transportation. You will see several other theme ideas, including individual investment recommendations, in investment and financial publications at the turn of the year, such as the Wall Street Journal, Barron’s, The New York Times, Forbes, and others. These are worth reviewing in order to come up with your own conclusions.
I believe one of the most favorable areas to invest in over the next decade is domestic oil producers. Restrictions on drilling in the U.S. limit the supply. Oil will be a critical necessity for a long time despite what you think about windmills and solar. Oil that flows from U.S. sources is more secure and valuable than that from the Middle East and other international geographies. You can imagine what might happen to the price of oil if there is an international incident or disruption. U.S. oil producers are soundly profitable at current oil price levels, and will only benefit if prices rise, which is likely if the economy improves. And most of these companies pay out healthy dividends and carry PE multiple valuations that are fairly modest; that is, they are good value.
Once you have identified the most promising themes to invest in, your stock selections should have, if possible, ample dividend yield. This is a more generic theme. A material and safe dividend provides some downside protection. And surprisingly, there is a direct positive correlation between dividend payout ratios and earnings growth, according to studies such as the one by Robert D. Arnott, an editor of the Financial Analysts Journal. The higher the payout, the faster the earnings pace. This startling relationship probably indicates that managements which pay out higher dividends have confidence in bright future earnings growth prospects. And dividend yield is a key indicator of financial stability, good cash flow, and quality earnings. Most importantly, dividends comprise more than 40% of total stock market returns (over the last 80 years). So if you are not partaking of dividends you are missing out on a major portion of stock market profits. Finally, dividend paying stocks out-perform non-dividend payers over the long-term, even in bull markets.
At the start of this new decade, be sure your investments are in the best themes and sectors, that they are the best areas for the decade ahead, not the one just ended. Peruse and review the year end and new year periodicals and sources that are contemplating on the subject of where to invest in the new year and the new decade ahead. Establish some New Year’s investment resolutions and some bullet points pertaining to portfolio achievements that you can work on during the year. These might cover aspects such as percentage gains or total capital, the ideal number of different stock holdings, your IRA account, stop/loss limits, listening to earnings conference calls, the addition of new positions, longer holding periods, and fewer transactions. I discuss such investment strategies and tactics in Full of Bull. Finally, in the New Year, invest properly. Observe. Read. Listen. Overhear. Ponder. Anticipate. Predict. Analyze. Question. Judge.