Since the inception of Investment Quality Trends in 1966, we have espoused the simple belief that the purpose of investing in the stock market is to realize a return on investment.
From that belief has emerged three clearly defined investment objectives: First, do not lose principle; second, earn an immediate return on investment; third, capture long-term capital gains for overall total return.
Admittedly, principle preservation is rarely associated with a stock picker. However, we have demonstrated that the enlightened investor can achieve principle preservation along with an immediate and growing stream of income (through dividends and dividend increases) and long-term capital appreciation for total return by restricting their investments to shares of high-quality, dividend-paying select blue chip stocks.
Our select blue chips
How do we define select blue chip? These qualifications weigh: lengthy profitable progress, growth of income and capital, professional management interest, liquidity and Standard & Poor's widely accepted long-term earnings/dividend quality ranking. These are the components of blue-chip quality. A past history of earnings, dividends, growth rates, institutional interest, financial strength, research and development, plus an appraisal of the future all bear on the valuations results.When does a stock become a select blue chip? According to Investment Quality Trends, a stock will rate such a designation after it has the following qualifications:
- The dividend has been raised five times in the last 12 years.
- It carries a S&P Earnings and Dividend Quality Ranking in the "A" category.
- It has sufficient liquidity of at least 5 million shares outstanding.
- At least 80 institutional investors must hold the stock.
- There have been at least 25 years of uninterrupted dividends.
- The earnings have improved in at least seven of the last 12 years.
Dividends meet the most basic of all investment fundamentals: income. Also, the underlying value of dividends will, in the long run, establish price. A consistently rising dividend best reveals a company's profitable progress. Further, the trend of dividends is more reliable and less erratic than the trend of earnings. The key to value then, lies in yield as reflected by the dividend trend. Individual stock prices fluctuate between repetitive extremes of high dividend yield and low dividend yield. We call these recurring extremes of yield undervalue and overvalue, and they represent our buying and selling areas.
"Values, when applied to stocks, are determined in the end by the return to the investor, and nothing is more certain than that the investor established the price of stocks." -- Charles Henry Dow
Research has proved that high-quality stocks seem to best resist adversity. In good times, they usually outrun both the economy and their lesser competitors. A range of price fluctuations in these stocks between undervalue and overvalue offers considerable price appreciation potentials. These are the companies that have made it through depressions, recessions and everything in between. Again and again, the evidence shows . . . there is no profitable substitute for quality.
Playing for the short term
Six to nine months is not the optimal timeframe in which to showcase our approach. The model portfolio most referenced by third-party analysts was started in 1986 and has averaged over 13% per year with 25% less risk than the Wilshire 5000. Consisting of all the stocks in our undervalued and rising trends categories (approximately 142 companies), it is clearly too large to be replicated by the average investor.So for the purposes of this Strategy Lab, we will borrow from both the Lucky 13 portfolio and the model portfolio at I.Q. Trends Private Client Asset Management.
In January 2000, we began publishing a list of our top 13 picks for the upcoming year. Dubbed the Lucky 13, these selections have generated an average total annual gain of 18.1%.
The model portfolio at Private Client, while based in part on the Lucky 13, is not a static portfolio and has returned, on average, in excess of 25% per year since January 2000.
