Why Stocks Are Down 9% In April And 6 Dividend Aristocrat Bargains

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I never claim that markets won’t get scary from time to time.

But I strive to teach my readers and Dividend Kings members the Zen of smart investing in scary markets so you can become a stock market genius.

To paraphrase Napoleon, the definition of a stock market genius is:

The investor who can do the average thing when everyone else around him/her is losing their mind.

This is how you can avoid costly mistakes, and even profit from every market downturn.

Instead of fearing volatility, you can embrace it as your best friend, and greatest ally.

“Volatility isn’t risk, it’s the source of future returns.” – Joshua Brown, CEO of Ritholtz Wealth Management

Stocks are having one of their worst months in years (13 years for some indexes).

So to help you stay calm, rational, and hopefully profit from the short-term pain, let’s look at why the market is crashing, and six incredible dividend aristocrat bargains that you might want to buy now.

Why Stocks Are Down 9% This Month (And The Nasdaq Almost 15%)

Ycharts

It’s the worst month for the Nasdaq since November of 2008 – the collapse of Lehman Brothers.

Daily Shot

Why are stocks falling? There are multiple reasons but here are the big three.

  1. Concerns about inflation and rising interest rates
  2. Concerns about corporate earnings growth
  3. Recession fears

The S&P 500 is set to join the bear market within weeks, as it faces a sharp pullback amid fears of aggressive Federal Reserve policy and soaring inflation, according to Morgan Stanley’s top US equity strategist…

“And that tells me we’re going into this final phase, which the good news. The silver lining… is that maybe we can finally complete this bear market over the next month or so,” he said. Wilson added that a 20% pullback for the S&P 500 from its January high of 4,800 would “complete” the ongoing bear market…

A fall of that size would take the S&P 500 to a level of 3,900, around 9% lower than Tuesday’s level of 4,296. ” – Business Insider (emphasis added)

This is what Mr. Wilson is basically saying.

  • GDP and earnings growth is slowing (compared to almost 50% growth last year it could only go down)
  • Rates are going (from record low levels they could only go up)
  • Expensive stocks tend to do very poorly when growth slows and rates rise
  • Stocks started the year overvalued
  • Thus a 20% correction (that brings stocks back to historical fair value) was Morgan Stanley’s base case to start the year

Morgan Stanley

This is not an example of Mike Wilson being a prophet, just a disciplined financial scientist who makes high probability base-case forecasts.

  • IF he’s right (and there is no guarantee that he is) the market has about 8% more to fall
  • if you try to sell now to buy 8% lower later you risk the market taking off on you
  • potentially locking in losses unnecessarily
  • to try to earn 9% higher future returns
  • 1.7% higher returns over 5 years and just 0.28% higher returns over 30 years
  • you risk potentially thousands of % of gains in order to try to scoop up another 9%

Dalbar

This is what you actually risk with market timing.

  • instead of making good long-term returns, you risk losing money, not even counting inflation

Daily Shot

If you just buy and hold, your probability of making money is 100% over 20 years and 94% over 10.

  • according to Fidelity, 98% of short-term traders lose money
  • 100% of long-term buy and hold investors make money
  • according to BAC’s head of quant analysis, missing the 10 best market days of each decade since 1926 would have turned a 1,150X inflation-adjusted return into a 94% loss

If you think you can market time your way to higher profits and lower short-term losses, you are 98% likely to be wrong. You potentially put your entire future at risk

  • with virtually zero chance of success
  • instead of going with essentially a sure thing with long-term blue-chip investing

Why Long-Term Investors Shouldn’t Be Worried

What about the other big risks, other than slowing growth, that has markets rattled?

  • rising interest rates
  • recession risk

Daily Shot

This chart might seem scary unless you understand the historical context behind it.

It means that by January 2024, Bloomberg’s economic model predicts the risk of a recession occurring by early 2026 is about 42%.

Modern Era Recessions

Recession Duration (Months) Declining Economy Time Since Previous Recession (Months) Peak Unemployment

Peak GDP Decline

Recession Of 1953 10 45 6.1% -2.6%
Recession Of 1958 8 39 7.5% -3.7%
Recession Of 1960-1961 10 24 7.1% -1.6%
Recession Of 1969-1970 11 106 6.1% -0.6%
Recession Of 1973-1975 16 36 9.0% -3.2%
Recession Of 1980 6 58 7.8% -2.2%
Recession Of 1981-1982 16 12 10.8% -2.7%
Recession Of 1990-1991 8 96 7.8% -1.4%
Recession Of 2001 8 120 6.3% -0.3%
Great Recession 18 73 10.0% -5.1%
Pandemic Recession 2 128 14.7% -19.2%
Average 10.3 67.0 8.5% -3.9%
Median 10.0 58.0 7.8% -2.6%
Mode 8.0 NA 6.1% NA
Max 18.0 128.0 14.7% -19.2%
Minimum 2.0 12.0 6.1% -0.3%

(Source: DK Research Terminal, Wikipedia)

In the modern era recessions average a 10.3-month contraction and occur every 5.5 years.

  • the average economic cycle lasts 6 years
  • the median economic cycle lasts 68 months (just under six years)

The current economic cycle began in April 2020.

Thus Bloomberg’s model is simply stating that six years into the cycle we have a 42% chance of a recession.

  • and a 58% chance of no recession

And what if we get a recession?

S&P Fundamentals During Recessions

Recession S&P Sales Decline S&P EPS Decline S&P Dividend Decline S&P PE Compression
1945 NA -6.5% -8.9% 33.6%
1948 NA 3.4% 25.1% -26.6%
1953 NA 11.2% 7.0% -7.1%
1957 NA -15.7% -3.9% -6.4%
1960 NA -3.1% 2.9% 8.6%
1969 NA -15.9% -5.9% -10.7%
1973 NA -18.8% -9.4% -54.1%
1980 NA -4.8% -1.2% 22.1%
1981 NA -20.8% -0.2% -14.3%
1990 NA -27.4% -2.0% 1.5%
2001 -1.2% -51.4% -5.7% -16.3%
2007 -11.4% -30.3% -19.5% 308.5%
2020 -3.7% -14.1% -2.0% 26.9%
Average -5.4% -14.9% -1.8% 20.4%
Median -3.7% -15.7% -2.0% -6.4%
Max -1.2% 11.2% 25.1% 308.5%
Min -11.4% -51.4% -19.5% -54.1%
Average (Excluding Great Recession & Pandemic) -1.2% -13.6% -0.2% -6.3%
Median (Excluding Great Recession & Pandemic) -1.2% -13.6% -0.2% -6.3%

(Sources: S&P, FactSet, Multipl.com)

In modern recessions, corporate sales fall around 4% to 5%.

Since WWII earnings tend to decline from 14% to 16% but excluding the two worst recessions in over 75 years, around 13.6%.

But the economy has changed and about 30% of S&P 500 profits now come from the 10 largest companies.

(Source: Morningstar) JNJ is the 10th largest by market cap

Because of the more recession-resistant nature of such businesses as Amazon (AMZN), Microsoft (MSFT), UnitedHealth (UNH), and Johnson & Johnson (JNJ), Citi thinks that the next recession will see a milder earnings decline.

According to analyst Michael Rollins, the fallout of a recession would be “felt mostly” in the first half of 2023, could hit earnings by 10%, and bring the S&P 500 (SP500) down to 3,650, with the response from investors to be earlier “on both the way in and out,” as with previous recessions.” – Seeking Alpha

  • Citi thinks a recessionary bear market = 13% lower stocks prices from here
  • 24% peak decline in S&P 500

If correct, this would be a bear market similar to the 1991 mild recessionary bear market triggered by the first Gulf War.

  • 21% peak decline

And remember that these are just forecasts, the economic data so far remains strong and no recession appears likely anytime soon in the economic data.

What about interest rates?

Why Investors Should Worry About Interest Rates

Daily Shot

The bond market expects the Fed to hike to 3.25% by early 2023 and start cutting soon after that.

JPMorgan

And even in the modern era as long as long-term rates are under 3.6% stocks tend to keep growing right along with earnings.

What if the bond market is wrong? What if the Fed hikes above 3.25%?

Daily Shot

Since 1990 guess how many sectors have fallen during Fed rate-hiking cycles?

ZERO.

Daily Shot

Volatility can be elevated, especially for tech, but buy and hold investors still historically make money when the Fed is hiking.

  • as long as they don’t get cute and try to time the market

So now that you know what market fears are likely overblown, here’s how to profit from them.

Six Amazing Dividend Aristocrat Bargains To Profit From The April Stock Crash

DK Zen Research Terminal

I’ve linked to articles providing an in-depth analysis of each company’s investment thesis, risk profile, valuation, and return potential.

Why these six aristocrats?

  • six companies in five sectors for prudent diversification
  • down 5.8% in April
  • down 14.2% YTD
  • 23% undervalued

This is a highly opportunistic 3.3% yielding aristocrat portfolio.

And it’s also one of the highest quality groups of companies on earth.

Fundamentals You Can Trust In All Economic And Market Conditions

Sorted By Overall Quality (DK Zen Research Terminal)

  • see section 2 of this video for more information about the 248 point DK safety and quality model
  • including the strong evidence that it’s one of the most comprehensive and accurate safety models on earth

For context, the average aristocrat has

  • 87% quality
  • 89% safety score
  • 84% dependability
  • 67% LT risk-management percentile

These six aristocrats’ bargains have superior safety, quality, dependability, and risk-management to the aristocrats, which are considered the bluest of blue-chips.

Sorted By Lowest Bankruptcy Risk (DK Zen Research Terminal)

How safe are these dividends and companies?

Rating Dividend Kings Safety Score (161 Point Safety Model) Approximate Dividend Cut Risk (Average Recession)

Approximate Dividend Cut Risk In Pandemic Level Recession

1 – unsafe 0% to 20% over 4% 16+%
2- below average 21% to 40% over 2% 8% to 16%
3 – average 41% to 60% 2% 4% to 8%
4 – safe 61% to 80% 1% 2% to 4%
5- very safe 81% to 100% 0.5% 1% to 2%
6 Aristocrat Bargains 94% 0.5% 1.30%
Risk Rating Low-Risk (75th industry percentile risk-management consensus) BBB+ Stable outlook credit rating 2.3% 30-year bankruptcy risk

20% OR LESS Max Risk Cap Recommendation (Each)

The average recession dividend cut risk during historically average economic downturns since WWII is about 1 in 200.

During a severe recession, it’s about 1.3% or 1 in 77.

Why are these dividends so safe?

DK Zen Research Terminal

We’re talking about well-covered dividends with the exception of APD.

  • APD is in the middle of a growth cycle and is covering dividends with debt, as it’s done many times over 40 years
  • S&P is aware of this and isn’t worried
  • A stable credit rating
  • Moody’s and the bond market agree

We’re looking at reasonable debt levels adjusted for industry and buybacks.

Elevated debt/capital is primarily a result of stock buybacks.

When a company buys back stock above book value, it reduces shareholder equity and pushes up debt/capital. Shares that are repurchased sit on the balance sheet as treasury stock which is primarily used for stock option compensation for employees. It’s treated as a liability. In fact, it’s an asset that can be sold to raise cash.

This is why so many A-rated companies have what looks like high debt/capital.

In fact, the average default risk with these aristocrats is about 2.3%, making this effectively an A-rated portfolio.

  • aristocrats average BBB+

And finally, let’s consider the dividend growth streak.

Ben Graham considered 20+ years of consecutive dividend growth a sign of excellent quality.

These aristocrats average a 45-year streak, more than 2X the Graham standard of excellence.

Ok, so now that you know why these are blue-chips you can trust, here’s why they are bargains you should consider buying today.

Long-Term Fundamentals That Could Change Your Life

DK Zen Research Terminal

These aristocrats yield 3.3% or more than 2X the S&P 500’s 1.5%.

The aristocrats yield 2.2%.

But more importantly, their average 11.8% consensus growth rate (8.5% S&P 500 and 8.9% aristocrats) means that analysts think these aristocrats can deliver 15.1% long-term total returns.

  • private equity strives for 15% long-term returns
  • Cathie Wood at ARKK strikes for 15% long-term returns

But rather than lock up your money for 7 to 15 years and pay fees as high as 2% and 20% or own hyper-volatile speculative growth stocks, you can potentially earn 15% returns with some of the world’s safest dividend aristocrats.

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential Long-Term Risk-Adjusted Expected Return Long-Term Inflation And Risk-Adjusted Expected Returns Years To Double Your Inflation & Risk-Adjusted Wealth

10 Year Inflation And Risk-Adjusted Return

Adam’s Planned Correction Buys 3.9% 18.9% 22.8% 16.0% 13.5% 5.3 3.54
6 Aristocrat Bargains 3.3% 11.8% 15.1% 10.6% 8.1% 8.9 2.17
Nasdaq (Growth) 0.8% 14.3% 15.1% 10.6% 8.1% 8.9 2.17
Dividend Aristocrats 2.2% 8.9% 11.1% 7.8% 5.3% 13.6 1.67
S&P 500 1.5% 8.5% 10.0% 7.0% 4.5% 16.0 1.55

(Sources: Morningstar, FactSet, Ycharts)

How impressive are 15% returns? It’s about what analysts expect from the 0.8% yielding Nasdaq.

And it’s far more than what they expect from the aristocrats or S&P 500.

What might this mean for you?

Inflation-Adjusted Consensus Total Return Potential: $1,000 Initial Investment

Time Frame (Years) 7.4% CAGR Inflation-Adjusted S&P Consensus 8.6% Inflation-Adjusted Aristocrat Consensus 12.6% CAGR Inflation-Adjusted Aristocrat Bargain Consensus Difference Between Inflation Adjusted Aristocrat Bargain Consensus And S&P Consensus
5 $1,429.63 $1,511.29 $1,810.86 $381.23
10 $2,043.84 $2,284.01 $3,279.21 $1,235.37
15 $2,921.94 $3,451.81 $5,938.19 $3,016.26
20 $4,177.29 $5,216.70 $10,753.24 $6,575.95
25 $5,971.97 $7,883.98 $19,472.60 $13,500.63
30 $8,537.71 $11,915.01 $35,262.15 $26,724.44

(Sources: DK Research Terminal, FactSet)

If these aristocrats grow as expected, they could deliver 35X inflation-adjusted returns over the next 30 years.

Time Frame (Years) Ratio Aristocrats/S&P Ratio Inflation-Adjusted Aristocrat Bargain Consensus And S&P Consensus
5 1.06 1.27
10 1.12 1.60
15 1.18 2.03
20 1.25 2.57
25 1.32 3.26
30 1.40 4.13

(Sources: DK Research Terminal, FactSet)

And potentially run circles around the S&P 500 and aristocrats.

What evidence do we have that these blue-chips can actually deliver anything like 15% long-term returns?

Historical Returns Since 1991 (Annual Rebalancing)

“The future doesn’t repeat, but it often rhymes.” – Mark Twain

Past performance is no guarantee of future results, but studies show that blue-chips with relatively stable fundamentals over time offer predictable returns based on yield, growth, and valuation mean reversion.

Bank of America

So let’s take a look at how these aristocrat bargains have performed over the last 31 years when over 91% of total returns were the result of fundamentals, not luck.

Portfolio Visualizer Premium

Analysts expect 15.1% returns and these aristocrats delivered 17.7%.

They expect the market to deliver 10% vs 10.5% since 1991.

Equally impressively, these aristocrats delivered far smaller peak declines during the 2nd worst market crash in US history, falling 40% vs 51% during the Great Recession.

  • 7.1% better annual returns
  • 62% better negative-volatility/adjusted total returns (Sortino ratio)

Portfolio Visualizer Premium

Ben Graham considered long-term outperformance to be another sign of quality, and 7X better inflation-adjusted returns than the S&P 500 over 31 years confirms these are world-class blue-chips.

  • 77X inflation-adjusted returns vs 35X potentially over the next 30 years

Portfolio Visualizer Premium

Across every average rolling time period these aristocrats have delivered returns on par with the greatest investors in history, and run circles around the S&P 500.

And what about income? The primary reason anyone owns aristocrats?

Portfolio 1991 Income Per $1,000 Investment 2021 Income Per $1,000 Investment Annual Income Growth Starting Yield 2021 Yield On Cost
6 Aristocrat Bargains $33 $4,359 17.68% 3.3% 435.9%

(Source: Portfolio Visualizer Premium)

These aristocrats in 1991 yielded 3.3%, the same as they do today.

They delivered almost 18% annual income growth over the last 31 years, turning $33 per $1,000 investment into almost $4,400 per $1,000 investment.

That’s a 436% yield on cost, showing the power of consistent double-digit income growth.

But of course, these companies aren’t expected to grow as fast as they have in the past. So what kind of income growth do analysts expect in the future?

Analyst Consensus Income Growth Forecast Risk-Adjusted Expected Income Growth Risk And Tax-Adjusted Expected Income Growth

Risk, Inflation, And Tax Adjusted Income Growth Consensus

15.1% 10.5% 9.0% 6.5%

(Source: DK Research Terminal, FactSet)

Analysts expect 15% annual income growth from these aristocrats which adjusted for the risk of these companies not growing as expected, inflation, and taxes is 6.5% likely long-term income growth.

Now compare that to what they expect from the S&P 500.

Time Frame S&P Inflation-Adjusted Dividend Growth S&P Inflation-Adjusted Earnings Growth
1871-2021 1.6% 2.1%
1945-2021 2.4% 3.5%
1981-2021 (Modern Falling Rate Era) 2.8% 3.8%
2008-2021 (Modern Low Rate Era) 3.5% 6.2%
FactSet Future Consensus 2.0% 5.2%

(Sources: S&P, FactSet, Multipl.com)

What about a 60/40 retirement portfolio?

  • 0.5% consensus inflation, risk, and tax-adjusted income growth.

In other words, these 10 A-rated high-yield blue-chips offer

  • over 2X the market’s yield (and much safer yield at that)
  • nearly 2X its long-term inflation-adjusted consensus income growth potential
  • 13X better long-term inflation-adjusted income growth than a 60/40 retirement portfolio

Bottom Line: The Economy Isn’t On Fire But Some Aristocrats Are Trading As If It Was

When stocks are crashing this fast it’s tempting to try to time the market and sit on the sidelines.

My father recently sold his Alibaba shares which made up 65% of his 401K (against my ardent risk-management recommendations) after the thesis broke.

He sure feels better now that BABA and all growth stocks are crashing for several weeks.

But I’m working very hard to remind him that it’s always darkest before the dawn, and no one rings a bell at the bottom.

Per my recommendation he bought a 50% allocation of LOW, MA, and AMZN the morning after the Nasdaq fell 4%

Daily Shot

According to Bloomberg and AAII, investor sentiment has now fallen to the lowest since 1992.

  • investors were more optimistic during the pandemic lows
  • investors were more bullish during the darkest days of the Great Recession
  • investors were more positive on stocks after 3 years of the tech crash

We’ve just witnessed the worst month for growth stocks since November 2008, when Lehman went under and the economy was on fire.

The S&P 500 has seen its worst months since the Pandemic when the economy was literally in the most severe (though shortest depression) in US history (-8% GDP contraction in a single quarter).

It’s time to buy when there’s blood in the street, and emotionally speaking that time is now.

Whether or not VFC, MMM, LOW, APD, SEIC, and ENB are personally right for you, the point is that NOW is the time to at least start buying.

Because to paraphrase Casablanca:

If the market leaves the ground and you haven’t bought some blue-chip bargains, you’ll regret it. Maybe not today. Maybe not tomorrow, but soon and for the rest of your life.

But if you’re looking for very safe, and steadily growing income, from quality blue-chips you can trust in any economy, then these six bargains are a potentially great choice.

  • 3.3% very safe yield
  • 11.8% growth forecast
  • 15.1% CAGR long-term return potential
  • 17.8% historical returns
  • 23% discount to fair value (a potentially very strong buy)