You Have to Be in It to Win It

Last week was another strong one for the real-money Inflation-Protected Income Growth portfolio. The portfolio's value improved by a touch over $665 last week, to end the week above $34,000. For a portfolio that started in December with $30,000, reaching a better than 13% return in five months would ordinarily be something to celebrate.

In reality, though, that performance had a lot of help. Over the life to date of the iPIG, the S&P 500 has actually risen a bit faster, up a bit more than 14%. The iPIG portfolio's stellar performance owes a lot to that general market tailwind. Still, a fundamental truth about the market is that to get any of the returns from investing, your money has to be at risk and invested. And from that perspective, the iPIG portfolio has been incredibly successful.

Built on a solid foundation
While many of the iPIG portfolio's gains were aided by the market's meteoric rise, each investment in the portfolio was a calculated choice based on principles first laid out nearly a century ago. Benjamin Graham, the father of value investing and the man who taught investing to Warren Buffett, laid out those key themes in a book called The Intelligent Investor.


Those principles were simple: Through dividends, companies show their owners that they're truly making money. Through paying careful attention to valuation, investors better protect themselves from overly optimistic corporate forecasts and projections. And through diversification, investors can protect their overall portfolio even if (or more likely, when) an investment fails.

The iPIG portfolio was founded on those principles, and it's because investments compatible with them were available that more than 90% of the initial cash in the portfolio has been put to use. The market's recent run has been wonderful, but there was no way to know that it would happen before it did happen.

Indeed, while the iPIG portfolio has been lucky to invest when it did, it was in large part manufactured luck. The portfolio was designed in a way that it would have been invested with the same principles even if the market were falling, instead of rising. Indeed, if the market had been falling, it's quite likely that closer to 100% of the initial cash would have been invested, rather than 90%.

Buy stocks when they're cheap
For instance, energy pipeline giant Kinder Morgan was picked for the iPIG portfolio. But its shares took off before they could go from pick to purchase. As a result, that stock was never bought, and about half of the iPIG portfolio's remaining cash is currently reserved for it, hoping for a correction.

On the flip side, the iPIG portfolio initially passed on Emerson Electric , in spite of its great business and dividend history, because its stock price was above the portfolio's buy-below valuation. Yet when the market later offered up Emerson at a lower, more reasonable price tag, the portfolio snapped up shares.

Nobody knew for certain that Kinder Morgan would get away or that Emerson Electric would retreat to a reasonable buy range. Still, setting the valuation principles up front enabled the portfolio to act appropriately for the situation, no matter what the market would eventually do to those shares' prices.

Watch that dividend quality
Similarly, by putting quality controls around a company's dividend and ability to pay it, the iPIG portfolio was able to miss one of the largest recent dividend blow-ups, Pitney Bowes . The company slashed its dividend in half last week, but before that cut, it had a 30-year history of regularly raising its dividend.

The iPIG portfolio managed to sidestep that cut by not being invested. It avoided Pitney Bowes because the company failed two key dividend quality tests that the iPIG portfolio relies on when making selections:

  • Its payout ratio was too high, so its dividend did not look adequately covered by earnings.
  • Its debt-to-equity ratio was too high, so its dividend looked likely to be at risk if the company stumbled.

As it turns out, sitting on the sidelines proved to be a prudent choice -- but again, one that was made because of the portfolio's foundational principles.

Realized success
Instead of being caught in a dividend takedown, the iPIG portfolio received a $0.55-per-share dividend from defense contractor Raytheon last week. That increase was the company's first dividend at its new, higher payment level -- a level that was set after the iPIG portfolio bought its shares.

The key difference between Raytheon and Pitney Bowes? When picked, Raytheon had a mere 35% payout ratio and a debt-to-equity ratio of only 0.6, much more comfortable levels. There was no certainty to those of us on the outside that Raytheon would raise its dividend and Pitney Bowes would slash its payment, but those key ratios tilted the odds in that direction.

There's still nothing certain in investing, but having a solid plan that lets you actually invest money before you know what the market will do is a great foundation for success.

iPIG portfolio snapshot as of May 3, 2013

Company Name

Purchase Date

No. of Shares

Total Investment (Including Commissions)

Current Value

United Technologies

12/10/2012

18

$1,464.82

$1,675.98

Teva Pharmaceutical

12/12/2012

38

$1,519.40

$1,463.00

J.M. Smucker 

12/13/2012

17

$1,483.45

$1,760.52

Genuine Parts 

12/21/2012

23

$1,476.47

$1,773.30

Mine Safety Appliances

12/21/2012

36

$1,504.96

$1,762.56

Microsoft

12/26/2012

55

$1,499.15

$1,841.95

Hasbro

12/28/2012

43

$1,520.60

$2,030.46

NV Energy

12/31/2012

84

$1,504.72

$1,783.32

UPS

1/2/2013

20

$1,524.00

$1,721.80

Walgreen

1/4/2013

40

$1,501.80

$1,920.80

Texas Instruments

1/7/2013

47

$1,515.70

$1,739.47

Union Pacific

1/22/2013

6

$805.42

$896.58

CSX

1/22/2013

34

$712.50

$843.54

McDonald's

1/24/2013

16

$1,499.64

$1,646.72

Becton, Dickinson

1/31/2013

18

$1,518.64

$1,753.74

AFLAC

2/5/2013

27

$1,466.35

$1,494.72

Air Products & Chemicals 

2/11/2013

17

$1,510.99

$1,526.60

Raytheon 

2/22/2013

27

$1,473.91

$1,702.08

Emerson Electric

4/3/2013

28

$1,548.12

$1,590.96

Cash

     

$3,117.16

     

Data from the iPIG portfolio brokerage account, as of May 3, 2013.

For more Foolish dividends
If you're on the lookout for companies that reliably pay you to own them, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks
. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.

The article You Have to Be in It to Win It originally appeared on Fool.com.

Chuck Saletta owns shares of Aflac, Texas Instruments, Microsoft, McDonald's, Genuine Parts, United Technologies, Teva Pharmaceutical Industries, Becton Dickinson, Walgreen, Union Pacific, Hasbro, UPS, CSX, J.M. Smucker, Air Products & Chemicals, Mine Safety Appliances, NV Energy, Emerson Electiric, Raytheon, and Kinder Morgan Management, a related company to Kinder Morgan. The Motley Fool recommends Aflac, Becton Dickinson, Emerson Electric, Hasbro, Kinder Morgan, McDonald's, Mine Safety Appliances, and UPS and owns shares of Hasbro, Kinder Morgan, McDonald's, Microsoft, and Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum