The U.S. market’s giants also have considerable foreign sales exposure, which favors them should non-U.S. economies shine brightest. Exchange-traded proxies for the group include Guggenheim Russell Top 50 Mega Cap ETF and iShares S&P 100 Index Fund. Both portfolios’ top-three holdings are Apple, Exxon Mobil and General Electric, but the iShares fund, with 100 issues, is less concentrated.
“The bigger, the better,” says Paul Nolte, managing director at investment manager Dearborn Partners. “If we do wind up with a slowdown, a lot of these companies can withstand that.”
2. High-quality companies stay qualified
The definition of “quality” in this bull market is a large company with strong finances, visible earnings growth and a global footprint. A dividend makes the stock even more attractive.
High-quality stocks are “quite inexpensive,” Savita Subramanian, Bank of America Merrill Lynch equity and quantitative strategist, noted in a recent research report. Plus, she adds, “industry leaders with clean balance sheets in a wide variety of sectors rank well on the quality scale.” Top-flight firms on Merrill’s list include PepsiCo, IBM and Caterpillar.
Quality plus growth equals stability, adds Brian Belski, chief investment strategist at BMO Capital Markets. “When things become more uncertain, investors tend to place a higher premium on areas of the market delivering consistent results,” he noted in a recent report. Stocks rated “outperform” on BMO’s quality screen include Google, Starbucks and Gap.
3. Dividends pay off
“Dividends still matter,” Nolte says. “There remains a lack of good choices for income investors,” he adds. Ultimately this quest for yield leads to stocks. Moreover, investors have no dearth of dividend-payers: 80 percent of the S&P 500 constituents now pay a dividend. Nolte’s favorites include multinational leaders Caterpillar, Novartis AG, IBM and McDonald’s.
That said, investors should focus on the business, not the yield. A high yield can reflect a poor-quality company, a troubled stock, and a dividend that could be in jeopardy.
Look instead for companies with a record of dividend growth, suggesting they are generating ever-larger amounts of cash to hand to shareholders. A broad proxy for the strategy is the exchange-traded SPDR S&P Dividend ETF, which tracks an index based on the S&P Dividend Aristocrats — companies hiking dividends for at least 25 consecutive years.
Be mindful of valuation, too.
Dividend-growth stocks aren’t undiscovered, and many have been bid up.
Says Wally Weitz, a longtime value-stock investor and co-manager of the Weitz Value Fund: “If you pay too much for a stock just because it pays a dividend, you’ve still paid too much for a stock.”
4. Europe goes up
Euro zone worries for now seem priced into market valuations and expectations. The MSCI Europe ex-U.K. Index, a proxy for the euro zone, rose 19 percent for the year through Dec. 20.
Moreover, two-thirds of managers responding to the Russell survey, for example, do not see a euro-zone nation exiting the monetary union, and better than half are maintaining current exposure to the continent.
Says Nolte: “Valuations on a lot of those markets have gotten very inexpensive.”