One Piece At A Time | Week Ended 3/27/2020
My investment strategy has changed a bit now my that my brokerage firm, as well as most others out there, have moved to ZERO commissions. I had typically tried to purchase in dollar amounts that put commissions at 1.0% or less. I've always wanted to implement, at least partially, the dollar cost average method but commissions prohibited me from pursing that. However, now it's very feasible and reasonable to do so.
My focus has always been on quality businesses, but the problem was typically buying shares at good valuations, often I had to settle for good enough. The longer that I've been investing, the more that I've come to realize just how powerful hitching your investment wagon to great companies can be. That's why I've shifted my focus to dollar cost averaging to build up my positions; because the larger your purchases the more attention that needs to be paid to valuation and vise versa.
I'd still prefer to do larger scale purchases, but the problem is that quality businesses don't often trade at good valuations. In general valuations aren't exactly cheap; so I'll just keep building up my stakes in great businesses.
A little bit of relief came to the markets last week with the S&P 500 climbing 10.3% from the previous week's close. My guess is this is more of a relief rally/dead cat bounce than the beginning of a sustained climb, but time will tell. As such I lowered my purchases during the week in hopes of preserving the cash that I do have on the sidelines and am tempted to sell some of the weaker holdings in my portfolio on any further upside. Honestly they were moves that should have been made a while ago.
As you can see I only put ~ $150 to work and didn't even purchase 1 full share of any of the companies that I bought last week. Some of that was due to the markets rebounding significantly after Monday, although admittedly I am hoping to save the majority of the cash in my Rollover IRA for better opportunities. Luckily most brokerages have moved to zero commissions as well as fractional share purchases so I was still able to make a few small buys.
The $149.81 put to work in my Rollover IRA increased my forward 12-month dividends for that account by just $3.25. That's a YOC of 2.17% for last weeks' purchases.
While the 52-week high isn't a good measure of the value of businesses, it can act as a reference point. Of course you have to make sure you're not anchoring to those highs and it still comes down to what the business is worth. That being said the purchases that I made were at pretty significant discounts to the 52-week highs.
The best purchase that I made last week in terms of % off 52-week high was Ecolab which was 39.8% lower than their 52-week high. On average the 3 small purchases were made at prices that were 35% lower than their 52-week highs.
Obviously we need to take those EPS estimates down and the P/E ratios up so I'm viewing those with a Costco sized tub of salt. The problem is that no one ever knew what the earnings would be and throwing all of the coronavirus issues on top of it and things are definitely up in the air.
Dividend yield theory is a valuation method that is all about reversion to the mean. The premise is that stable companies that pay dividends will see their valuations fluctuate around their 5-year average dividend yield, all else being equal.
Based on dividend yield theory these purchases have 34%, 36% and 10% upside, respectively.
My FI Portfolio's forward 12-month dividends are at $8,112.42 with my FolioFirst dividends at $101.96 My Roth IRA's forward dividends are $670.37 while my Rollover IRA's dividends are $2,655.40. My taxable accounts can expect to produce $8,214.38 over the next year with all accounts providing $11,540.15.
What businesses are on your radar to add? Do you think the selloff will continue or is the worst of it behind us?