Focusing Your Portfolio on Glitz & Glam Is a Mistake
TL;DR
Investors can easily be drawn to headline-grabbing stocks, like unprofitable tech companies or overhyped IPOs. Instead, they should focus on “boring” companies with sound fundamentals and strong cash flows that reward shareholders with time-tested, growing dividends.
Online dating app Tinder recently reported the 15 most right-swiped jobs for men and women, and they’re hardly surprising.
For women, the top three were (1) physical therapist, (2) interior designer and (3) entrepreneur. For men, it was (1) pilot, (2) entrepreneur and (3) firefighter.
But regardless of how much dating success people in those careers may experience, perceived sexiness doesn’t translate well for investing success:
- Pilots, for example, are adored. But the airlines they work for are on our no-fly list of stocks.
- ‘Entrepreneur’ is just an alluring way of saying ‘not profitable.’
- And despite their success in calendar sales, we’re unsure how to go about investing in firefighters.
As for Tinder-owner Match Group (MTCH) — which also owns Hinge, Match, OkCupid, Plenty of Fish and several other dating platforms — its stock, which doesn’t pay a dividend, has dropped -17% over the past six months, -24% over the past year and a nausea-inducing -64% over the past five years, proving that a company can attempt to gauge what is and isn’t sexy, but it’s no help to its own performance.
Big & Boring
When it comes to investing, seductive stocks are better suited for those with higher risk tolerances. Can they be profitable? Surely. Growth investing wouldn’t be as popular as it is today if those stocks didn’t produce above-average returns.
However, they also:
- Can just as easily produce gut-wrenching losses.
- Hardly ever pay dividends.
- And often produce negative earnings per share (EPS).
For long-term investors seeking safer investments who are fine with slow and steady growth and are drawn to the passive income potential of established dividend-growers, big and boring is the way to go.
Consider this: Why would you ever want to sell assets to produce income when “big and boring” stocks that pay dividends can produce that income for you while you maintain ownership of the shares?
Think of it as the Ben Stein of investing strategies. Boring? Yes. Profitable? Also yes.
Hot Trash
Take, for example, Waste Management (WM) and Republic Services (RSG), the waste disposal giants we recommended on Oct. 30, 2023. Since that issue, those two stocks are up 17% and 18.5%, respectively.
The companies are the epitome of boring, but since 1968 and 1981, they’ve been taking out the trash … and making enormous profits doing so.
In Q3 2023, WM posted an EPS of $1.63 and RSG had an EPS of $1.54. For revenue, the companies saw $5.2 billion and $3.83 billion that same quarter. Icing the cake, WM grew its dividend 8.91% last year, with RSG just behind with a 7.73% increase.
That’s not a short-term trend, either. Here’s a look at each company’s dividend growth rate over the past decade:
Literal garbage stocks might not be sexy, but you know what? They work.
For context, over that same timeframe, Tesla (TSLA) is down -8.26%. Compounding investors’ frustrations, the company doesn’t pay a dividend. I’m not sure what’s sexy about an anti-Semitic, drug-addled conspiracy theorist CEO … but hey, you do you, boo.
IPO’s are sexy, too, right? Maplebear (CART), which does business as Instacart, had a lot of hype last year ahead of its Sep. 19 public offering. During the pandemic, the grocery service became a household name, with its essential workers providing us with door-to-door delivery of the two most coveted items of 2020: toilet paper and alcohol.
But shares of CART are down -29% since its IPO, and because the company isn’t profitable, it too doesn’t pay a dividend. “Isn’t profitable” is putting it very lightly. In Q3 2023, Instacart’s estimated EPS was -$0.78. However, during its earnings call, the company reported a horrifying EPS of -$20.86.
Visual data’s fun, so here’s how those aforementioned companies stack up against each other over the past six months, with TSLA in dark blue, CART in orange, RSG in light blue and WM in yellow:
Boring wins. In the short-term it wins; in the long-term it wins.
Part of the reason why: The sectors boring companies operate in are typically the ones that provide Americans with their needs rather than their wants. Think consumer staples, materials, utilities, energy and healthcare. These sectors are more resilient to macroeconomic forces and often exhibit inelastic demand in times of elevated inflation or recession.
We encourage you to revisit our issue on how to find stocks on your own. Be sure to add filters for those sectors, dividend yields and dividend growth. And when the stock screener spits out the results, embrace the boring.