There are various things retirees can do to protect the principal of their dividend portfolios. At the stock level, retirees can buy quality businesses with a minimum credit rating of BBB, a strong moat, and a long history of profitability at a margin of safety. Retirees should also ensure their portfolios are sufficiently diversified and build a cash reserve to sail smoothly through market downturns.
Looking at a company’s credit rating is one factor of quality that can be easily checked.
Companies that have manageable levels of debt, good earnings potential, and good debt-paying records will have good credit ratings. – Investopedia
A company rated as BBB or higher by Standard & Poor’s or Moody’s is considered investment grade. The higher the rating, the higher the quality. Retirees can add a layer of safety by investing in stocks that have a credit rating of BBB+ or higher.
Johnson & Johnson (NYSE:JNJ) and Microsoft Corporation (NASDAQ:MSFT) are both awarded the strongest S&P credit rating of AAA.
Earnings or cash flow stability
Depending on the type of the company, you would want to look at its earnings or cash flow history to see how stable its profitability is and if the company tends to grow its profitability over the long run.
Nintendo Co., Ltd appreciated more than 100% in July after the launch of Pokemon GO. A month later the shares have already declined 27% from the peak.
Speculating is not investing
It’s great if you got in on the action before Pokemon GO was launched, but after the launch and the stock already went up, it’s too late to jump in.
To add to that, no one knows how long people will continue playing Pokemon GO. Actually, Pokemon GO already lost some users as the hype dies down a bit.
If investors are buying Nintendo just because of Pokemon GO, it’s purely speculation and not investing, unless they believe in the future of Nintendo as a company.
Besides, it’s not like Nintendo owns the Pokemon game. Check out Quora for the relationship between Nintendo, Niantic, and the Pokemon company and find out who benefits from the game.
In fact, I was surprised by the answer that Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG)(NASDAQ:GOOGL) get a share of the pie. I think both of these tech giants are better investments than Nintendo, especially Apple, which trades at about 12.9 times earnings and yields 2.1% at about US$108 per share.
Gotta catch ‘em all?
In the Pokemon world, one of Ash’s goal was to catch all the pokemon. Not for investing, though. You better not try to catch ‘em all. Read More
Following Ben Reynold’s popular article on 3 important dividend investing concepts with real life examples, I gave some thought about the important concepts about investing.
“Never lose money.”
This is Warren Buffett’s No. 1 rule: “Never lose money.” and his No. 2 rule is “Never forget rule No. 1.”
By buying and holding great companies which have track records of delivering results, you cannot lose money given your holding period is forever. If you are buying the best of the best companies, why would you ever sell it?
One easy way to tell that a company is great is if it has increased its dividend for many consecutive years. In Canada, the longest dividend growth streak for a publicly-traded company is more than 40 years. Fortis Inc (TSX:FTS) is one of two companies that has achieved that.
Unfortunately, Fortis is fully-valued and trades at a price-to-earnings ratio (P/E) of 20 at about CAD$43 per share. Whenever it yields close to 4%, it’ll be a decent place to buy some shares.
In the U.S., the longest dividend growth streak is more than 50 years!
Here’s a list of Canadian dividend-growth stocks and U.S. dividend-growth stocks that are updated by devoted investors who update them every month. Read More