There are a bazillion things for investors to worry about, if they’re prone to worry.
Inflation … supply issues … the pandemic … litigation … the labor shortage … political wrangling … global warming … commodity prices … interest rates … and so on and so on.
I’m not saying those things are immaterial. I mean, there really are supply issues on critical products such as semiconductors, and those can and do affect the stock market. The labor shortage really is hurting many businesses and industries. Etc., etc., etc.
But when it comes to the process of putting together the Income Builder Portfolio — or any portfolio in which investors make regular, relatively small buys over years and years — little of that stuff matters much.
One of the IBP’s main missions is to provide ideas for fellow Dividend Growth Investing practitioners, especially those who are still learning about the strategy. So I try to ignore distractions when discussing investment candidates and portfolio-building concepts.
Our Latest Buys
On Monday, Oct. 18, I executed a series of purchase orders for shares of four stocks: asset manager BlackRock (BLK); health-insurance titan UnitedHealth Group (UNH); investment bank Morgan Stanley (MS); and coffee king Starbucks (SBUX).
In dividing this website’s $1,000 semi-monthly allocation equally between the four blue-chip companies, it was my way of saying: “I know stuff that affects the market goes on all the time, but I’m simply going to keep investing in industry leaders, a little bit at a time, as we build an income stream within our high-quality, dividend-growing portfolio.”
I mean, getting hung up on external “noise,” or even on stock valuations, when making $250 buys like these doesn’t make a lot of sense to me.
For example, the IBP already owned a stake in BlackRock. When I considered adding to the position, I did note that BLK’s price/earnings ratio was at a multi-year high.
If I were adamant about investing $100,000 right now, BLK’s valuation might give me pause … but I’m not investing $100K or $10K or even $1K.
As I mentioned in my previous article, in which I presented my investment thesis for BlackRock and the other three companies I selected, BLK just had its latest in a series of awesome earnings reports. Business is booming, and the company is a dividend-growing machine, so I felt very comfortable adding another $250 worth here.
So, how “buyable” are these companies?
Here is a look at their forward P/E ratios, Morningstar’s fair-value estimates, and several analysts’ price targets:
With a 30 forward P/E ratio, Starbucks looks quite expensive. Then again, Morningstar says it’s trading just about at fair value, and all of the analysts I looked at give a future target at least 15% higher than Monday’s price.
UnitedHealth Group is trading at a 22% premium to Morningstar’s fair-value price of $350 … but analysts are bullish about UNH.
Of the four companies, Morgan Stanley is getting the least love from analysts, with few giving price targets that show a 10% gain over the next year or so.
Nevertheless, CFRA’s Kenneth Leon called MS “a transformed company, delivering consistent and recurring fee revenues and cash flow,” and said it’s a bargain at its sub-14 forward P/E ratio. And Value Line expects Morgan Stanley’s share price to appreciate as much as 64% over the next 3-5 years.
Value Line also went out of the way to mention Morgan Stanley’s recent doubling of its dividend, saying: “The dividend yield now considerably exceeds the Value Line median, providing a significant draw for income-seeking investors.”
And Speaking of Income …
The additional shares of BlackRock, Starbucks, UnitedHealth and Morgan Stanley that were bought Monday will add about $19 to the IBP’s income stream. The four positions now are expected to produce about $268 in annual income, roughly 8.3% of the portfolio’s projected $3,210 total.
If an investor wants to receive a company’s next dividend payment, he or she must buy at least one day before the ex-dividend date. For example, Morgan Stanley’s ex-div date is Oct. 28, so those seeking the November distribution need to own shares by Oct. 27.
Here is the schedule of pertinent dates and payout amounts for each company:
“INCOME” refers to the next scheduled quarterly payout based on the number of shares of each position the IBP currently holds. Portfolio rules mandate “dripping,” the informal term for dividend reinvestment; “DRIP” represents the approximate fractional share total of each company that the reinvested dividend will buy.
All 44 companies in the IBP (see them HERE) go through the dripping process — quarter after quarter, year after year — thereby building a growing, reliable income stream. The portfolio’s long-term income target is $5,000 after 7 years, and we are well ahead of that pace.
Wrapping Things Up
I am not suggesting that investors be unaware of what’s going on in the world around them before they put their hard-earned money to work. That would be foolish.
What I am saying is that letting oneself get distracted by short-term noise is not good long-range investment strategy, especially if one is making the kind of regular, small investments that we do with the Income Builder Portfolio.
BlackRock, Morgan Stanley, Starbucks and UnitedHealth Group were great companies a quarter-century ago and a decade ago and last year … and I have no reason to believe they’ll be anything but relevant, high-quality businesses a year, a decade and a quarter-century from now.
— Mike Nadel
The goal? To build a reliable, growing income stream by making regular investments in high-quality dividend-paying companies. Click here to access our Income Builder Portfolio and see what we’re buying this month.