“Conservative investors sleep well.”
– Philip Fisher (The Maxims of Wall Street, Page 136)
Last month, I wrote a column in Wealthy Retirement titled “Dividend Stocks: The Lazy Man’s Key to Beating the Market.”
At the end of that column, I referred to the “sleep well at night” (or SWAN) strategy − that is, a strategy focused on low-risk, high-return opportunities in stocks and funds.
My friend Wendell Brock, an MBA and financial advisor at Yield Financial Advisors in Dallas, Texas, came up with the idea. He states, “SWAN is built around risk management and downside protection, aiming for a steadier ride rather than maximum upside.”
How to Find SWAN Stocks and Funds
The idea behind the SWAN strategy is to invest in companies and funds that have three characteristics:
- They are profitable, well managed, and in growth industries.
- They have relatively high dividend yields, but not too high. (Their payout ratios should be less than 100% of earnings.)
- They regularly increase their dividends.
A high and rising dividend in a growth industry comes the closest to “sleep well at night” investing.
As Philip Fisher, the father of famous money manager Ken Fisher, says, “A company can best serve its investors by following a consistent, predictable dividend policy” (quoted in The Maxims of Wall Street, Page 183).
Investment manager Lowell Miller concurs in his work The Single Best Investment. He writes, “Dividend growth is the true signal of a prospering company” (Maxims, Page 183).
My Favorite SWAN Stock
I’ve mentioned Main Street Capital (NYSE: MAIN) several times in these columns. I’ve recommended it since 2011, and it’s one of the oldest and biggest holdings in my IRA. Based in Houston, it’s considered the best-managed business development company around.
As you can see from this chart, its total return has consistently outperformed the S&P 500 Index, including dividends.
The truth is out: Dividend growers and initiators like Main Street Capital beat the market.
In fact, Main Street Capital is the only stock I know of that pays out a monthly dividend as well as quarterly supplemental dividends. It has increased its dividend five times in the past two years.
The best SWAN strategy is to invest in companies that increase their dividends over time. This chart demonstrates the benefits.
Source: Ned Davis Research & Hartford Funds
It’s clear that companies that raise their dividends every year handily beat the market, by about 3-to-1. There are dozens of them in a variety of investment categories, including finance, energy, commodities, and technology. Main Street Capital is just one of them.
I highlight many others in my monthly newsletter, The Skousen Report. My goal is to create a SWAN strategy with dividend-paying stocks and funds. My record shows how conservative investors can beat the market year after year without taking huge risks.
What Happens to Growth and Income Stocks During a Bear Market or Crash?
It’s important to note that dividend-paying stocks are not immune to bear markets. They can decline along with other stocks.
However, they cushion the fall and give investors an opportunity to reinvest the dividends at bargain prices.
As Chief Income Strategist Marc Lichtenfeld points out, “If you’re invested in dividend-paying companies and reinvesting your dividends, a decline in share prices can work in your favor. In fact, a bear market could be your best friend.”
Admittedly, Main Street Capital did collapse twice since its inception in 2007 – first during the 2008 financial crisis and second during the March 2020 pandemic-induced drop.
However, the company continued to pay its regular monthly dividends during these two crises and never cut its dividend. That said to me that it would survive and recover.
Indeed, that’s exactly what happened. The stock recovered sharply in both cases, and I didn’t lose any sleep over this time period.
If a company cuts its dividend, it’s best to drop the stock and stick with dividend gainers. (Notice that dividend cutters are the worst performers on Wall Street.)
Jeremy Siegel, the “Wizard of Wharton,” says it best: “Dividends are the critical factor giving the edge to most winning stocks in the long run” (Maxims, Page 183).
Marc has written an excellent book on the subject, called Get Rich with Dividends. I recommend you buy it.
Special Announcement: New Edition of The Maxims of Wall Street Arrives This Week!
In this column, I’ve quoted quite a bit from my classic book The Maxims of Wall Street, now in its 12th edition. As many of you know, the book has been out of stock for the past month as we’ve waited for a new printing.
Well, I have good news to share! Copies are hot off the press and expected to arrive this week. Thanks to all who have been patiently waiting for a copy (or copies). I’ll be signing them and shipping them out as they arrive.
For those of you who do not have a copy and wish to order one or more at a nice discount ($22 for the first copy and only $12 for additional copies), click here. I autograph all copies and ship them inside the U.S. at no extra charge.
With this new printing, Maxims has now sold 100,000 copies! My publisher tells me that only 0.1% of all books sell 100,000 copies or more. It’s time to celebrate.