Stocks 303 – Investing Strategies
You’ve opened up your brokerage account, have an eye on a few familiar companies, but unsure what kind of investor you will be. It is important to know your investment strategy before you begin buying and selling multiple stocks. There are many styles for stock investing, such as: sector or industry focused, dividend growth, buy and hold, short selling, and high frequency trading. We will focus on three known successful strategies.
Investing in particular sectors or industries allows you to narrow your focus on the companies that you may have expertise in. For example, computer engineers would have a better understanding of the technology industry than a doctor would. While at the same time, that doctor would have the upper hand on the healthcare sector than the majority of investors.
Here is a list of the sectors and some major companies within each sector:
Basic Materials – Dow Chemical, E. I. du Pont de Nemours and Company, Sherwin-Williams Company
Consumer Discretionary – Amazon.com, Home Depot, Comcast, Walt Disney Co., McDonald’s, Starbucks, Nike, Lowe’s
Consumer Staples – Proctor & Gamble, Coca-Cola, Wal-Mart Stores, PepsiCo, Walgreens, Costco Wholesale, Mondelez International
Energy – Exxon Mobil, Chevron, Phillips 66
Financials – JP Morgan Chase & Co., Wells Fargo & Co., Bank of America, Citigroup, Goldman Sachs, American Express, Visa
Health Care – Johnson & Johnson, Pfizer, Merck & Company, UnitedHealth Group
Industrials – General Electric, 3M Company, Honeywell International, Boeing Company, United Parcel Service, FedEx Corp.
Technology – Apple, Microsoft, Facebook, AT&T, Alphabet Inc. (formerly Google), Verizon Communications, Intel, Cisco Systems
Utilities – NextEra Energy, Duke Energy, Southern Company, Dominion Resources
The beauty of dividend stocks is no matter the current ups, downs, rain, snow, or sleet, that dividend payment will reach your account when it’s due. What is important in investing for dividends is the sustainability of its future payouts. You can search for a high paying dividend this quarter, but what is the company’s track record on consistency of paying dividends. Companies with strong cash flow are routinely shelling out dividends for their shareholders, while weak cash flow is a red flag for continuous payouts.
Industry leaders will typically be the sweet spot for consistent and growing dividend payments. For example, Coca-Cola has never seen a decrease in annual dividend payments. In fact, the company has increased dividends payouts every year since they begin issuing dividends in 1962. Over 50 years and counting – now that’s great American ingenuity.
Evaluating current earnings metrics aren’t the only place to look when finding a potential growth dividend stock. Investors must look long term. The future earnings growth and profitability will allow a company to maintain a strong increase in yearly payments. When it comes to dividend stocks, the minimum holding period should be one year. It’s better to collect a full year of dividends and long-term capital gains versus taking on higher short-term capital gains tax.
When buying a dividend stock, you will see an ex-dividend date, which means the stock has to be purchased before that date, in order to be eligible for the upcoming dividend payout. However, it’s common the stock will trade less than the prior day’s price. So buying the day before the ex-dividend date just to receive the dividend is risky of share price depreciation.
In the previous section, we discussed short selling and its risks, so for this part we will focus on investing for the long haul. The market ups and downs scare the novice investor, but over the long-term the overall market always rises. Investing over a period of years is more of a temperament trait than a strategy. Staying confident the stocks you’ve picked will rise, is just as important as the research is, when it comes to building a winning portfolio. It is those who stick with their gut when the markets are struggling, who see their investments grow into fruition.
According to the research done by Jeremy Siegel in the bestselling book, Stocks for the Long Run (a part of The Wealth Junkie’s great reads collection), stocks generally return 7% on average. That itself outperforms any other financial asset on the market. Another reason many investors choose the buy and hold approach is the benefits of avoiding paying capital gains taxes, until the stock is finally sold. When frequently trading, you are required to pay capital gains taxes for every stock you sell.
Before diving deep into investing in stocks, be sure to have a strategy that fits your personality. Sticking to your strategy will help prevent you from being influenced by up or down markets, that could lead to bad decisions. So what’s your investing strategy going to be?