Watching, waiting, deliberating…

With the US elections over and the political terrain pretty much unchanged, the investment world has gone back to worrying about a host of problems that never really went away.

 

Top of the pile is the so-called ‘fiscal cliff’ that the US economy will apparently drive over at the end of December 2012 when the Bush era tax cuts are slated to end and mandatory spending cuts kick in. The fear is that this double-whammy will send the fragile US economy back into an economic death spiral and drag the rest of the world with it.

 

In Europe, Greece needs to roll over billions in debt this week or face crisis (again) and the International Monetary Fund (IMF) and EU policymakers are at odds over how to fill the gap. The Spanish are on the ropes and need tens of billions of Euros. Mass strikes are erupting across Europe, Germany is catching the Euro-flu, and China’s economy is rapidly cooling thus hammering commodities and natural resource-based economies like Brazil, Australia and Canada, which also suffers from a supremely overvalued housing market that is starting to crack as people struggle under record debt levels.

 

All of this means that volatility is up in the stock markets, panic is starting to rear its head and money is pouring out of stock markets and into the so-called safe haven of government bonds, pushing up bond prices yet again and depressing yields to levels rarely seen before.

 

So what does this mean for the Child Millionaire portfolio builder and what should we be doing?

 

As I’ve mentioned before, one of the key components of success with the Child Millionaire portfolio is to purchase high quality dividend aristocrats when they go on sale to achieve the highest possible yield [yield = the annual dividend / the share price]. Over the long term this results in turbo-charged compounding.

 

So right now the time is ripe to be assembling a shopping list of candidate shares for your Child Millionaire portfolio and be ready to pull the trigger if/when any of the on-going crises kick-starts a full-blown stock market panic.

 

Remember that when share prices drop, risk is being squeezed out of the system and you want to be buying when everyone else is selling. Most people do the opposite, which explains their poor investing performance.

 

The key points to choosing companies to invest in:

 

  • Long, unbroken track record of paying dividends with a yield above 2.5% but preferably closer to 5%
  • Payout ratio of dividends as a percentage of net profit <75%
  • Long track record (10+ years but preferably 25+ years) of increasing the dividend year after year – this is fundamental!
  • Dominates an industry sector with the top brand(s) and/or has another ‘moat’ that makes it highly resistant to competition such as expensive hard-to-duplicate infrastructure like pipelines
  • Is not susceptible to company-level catastrophic risk – think BP and the Deep Water Horizon
  • Growing sales and market value year after year, even if very slowly

 

I’ll cover some of the specific shares I’m looking at in the next posting, but for now start researching and create a short list of shares and be ready to pull the trigger when the next crisis erupts and panic ensues.

 

 

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