Summary
- Growth underlies most investing as it pushes stock prices up and supports dividends.
- Dividends are great, but do not necessarily imply a company is healthy enough to keep paying dividends.
- We must always analyze the underlying businesses of companies, regardless of the category they get lumped into.
- Hedging for inflation is a temporary endeavor as inflation is structurally impossible for any extended period of time with an aging population.
- We must balance all of our investment goals, but keeping growth as an underlying principle is a great way to satisfy all your goals.
There is a notion that I favor growth over all else. That’s an incomplete take on my view. Growth is only the left portion of our 2020s Investment Barbell.
My Quick Thoughts On Growth
You should have a very heavy slug of growth in your portfolio. Generally, that means that 60-80% of your holdings should be grounded in growth principles – even the dividend payers.
Growth is where we find stocks that rise hundreds or even thousands of percent over long periods. It is also where we find companies that graduate from “high growth stocks” to “growth and income” plays. I think Apple (AAPL) and Microsoft (MSFT) are the poster kids for that.
So, when you think growth, don’t just think “to the moon,” think about where the next 5 years of dividends will come from.
Our 4-step investment process starts with identifying the long-term secular trends to primarily invest in. It’s fairly easy to see that the three biggest secular trends are:
- aging demographics impact.
- 4th Industrial Revolution technology.
- the clean energy transition.
There’s trends within those trends, but those are the biggies. Here’s what to understand about those three trends.
They are all deflationary in the intermediate to long-term.
Nothing can change that for more than a few years at a time.
Once we identify and accept the secular trends – I say accept because we fight the future with what is in front of us right now and just behind us – we can then focus on what government and central banks are doing. That’s a wild mix and moves at varying speeds.
What we know is that governments in recent years have stepped up pushing the clean energy transition since Saudi Arabia and Russia became successful at pushing oil prices up in 2021 after 7 years of trying. It is especially true since Russia invaded Ukraine.
Technology is at the core of not only new cleaner energy production, but making industry, transportation and all forms of commerce more efficient.
So, between where technology improves industry and commerce, and the clean energy transition, we have two massive growth drivers that will make some stocks head “to the moon” while others throw off ever increasing dividend income.
Thinking Through Inflation Investing
On the right side of the Investment Barbell, you have very cyclical holdings that we use to hedge inflation and usually receive income. The amount on this side of the barbell fluctuates with cycles, but is generally 20-40% of your portfolio.
On the inflation side of the barbell, I favor real estate holdings, both REITs and private holdings. But, I know that over the past 20 years, only storage and industrial REITs have outperformed with any consistency. The rest have been choppy and very susceptible to economic slowdowns.
I think gold is better held in 1 ounce bars and heirloom jewelry, but the gold and gold stock ETFs, as well as, a few gold stocks are tradable over a cycle or parts of a cycle. Gold securities are not really “forever investments” as many gold bugs have proven the past 20 years – ask Peter Schiff on a non-shill day.
I have position traded materials stocks several times in my career. Freeport McMoran (FCX), which is a great proxy for copper and other industrial metals, has been in my portfolio four times since 2002. When Freeport bottoms, it always signals (at least the last 4 times) a broader market rebound to come.
It should be easy to see that stocks are very likely in a precarious condition right now – which is why we are heavy in cash temporarily.
I have become a Bitcoin believer as family offices and institutions started to accumulate. Remember what Grandpa told me about money. “Kirk, if you want to know how things work, follow the money.” Well, big rich money is flowing into Bitcoin, accumulating on this sell-off.
We find alternative energy on both sides of the barbell because utilities, independent and regulated, are actually leading the charge into clean energy, though not the manufacture of all the pieces.
In a recent FERC and industry study suggested that 80% of U.S. electricity could be alternative clean energy within a decade. That’s quite a transition and much of it pays a dividend already.
It’s easy to see how growth and income dovetail. Companies like Brookfield Asset Management (BAM) manage yield cos such as Brookfield Renewable Corp (BEPC) which throw off a dividend more than 50% higher than the S&P 500 (SPY), but also growing much faster as well.
Importantly, alternative energy is a hedge against inflation in two ways. First, as fossil fuel prices rise, that’s good for alternative energy. Also, as alternative energy is deployed, it cuts the demand for fossil fuels, quelling inflation (we know that about half of inflation has been energy prices lately).
Closing Investment Thoughts
These were just some items running through my mind after a talking to a retiree who wanted to understand my approach on dividend investing.
The bottom line is I love dividend investing. But, I also believe that valuations on many dividend stocks were far worse on a forward looking basis than the Invesco QQQ (QQQ) stocks, such as Microsoft and Apple.
I also know that a couple hundred dividend paying stocks are going to run into trouble paying their dividends in a recession or tighter monetary environment when the Fed isn’t buying corporate bonds like in 2020.
Remember, in late 2019 and early 2020, I warned against a downturn based on a similar thesis.
2020 Outlook: Euphoria To Despair
Expect Major Stock Market Challenges In 2020
Covid actually bailed out a lot of zombie companies (low or no growth, but high debt) into the middle of the decade.
The market will recognize the weaknesses ahead of time. It’s hard to tell when. But, when the time comes, you don’t want to be anywhere near those zombies, because they are going to get beaten until they are dead.
What is coming is what I am calling the “Great Divergence.”
I’ll write a lot more about the market divergence that is coming. The quick take though is that a lot of stocks that fall in this correction ain’t coming back.
And, the leaders during this energy transition will more and more be clean energy over fossil fuel producers (emphasis producers). Natural gas, refining and refining will have some winners, but most E&Ps are in still mostly in trouble.
In addition, there are plenty of metals and minerals coming online by 2024-5 to support EVs, batteries and solar components. The manufacturing scale is being timed to coincide with that.
And, of course, it is all tied together with technology. Tech is still King. It’s just 4IR tech now.
Disclosure: I/we have a beneficial long position in the shares of QQQ either through stock ownership, options, or other derivatives.
