Streetwise for Sunday, January 23, 2021

As we move into the New Year, there is little doubt that the prognosticators of doom will once again attempt to feast on your fears. And their theme is always the same. The market is too high and “what goes up must come down.”

At the same time, naivety on the part of many often leads to an unrestrained contagion of concern, often resulting in carnage and a decimation of investment expectations.

Yet, the premise that quality companies will see enhanced shareholder valuations under the codicil of rising dividends and increased retained earnings remains valid.

Let us approach the problem with an initial tenet that no one can predict what the financial markets are going to do and when...period. Those who say or imply otherwise are, to put it politely, misinformed.

If you say that the markets have the potential for varying degrees of volatility going forward, I will certainly agree. Professional trader armed with sophisticated computational tools with the ability and resources to trade significant quantities of securities and cash virtually instantaneously, can and do have a profound effect on the markets.

The result being that large pools of capital continually ebb and flow, driven only by an insatiable desire for a quick profit. Yet, as we move into the New Year there is no reason to believe that Armageddon is just around the corner.

Yes, there are political and economic problems that will exacerbate the market’s day to day volatility. This you will have to accept. However, do not allow yourself to be distracted or swayed by the passions of the market or the media.

Stock trades are mutually independent random events. Moreover, stock valuation is a matter of individual assessment that is subject to change without notice and for no apparent reason.

When a trade of any commodity occurs, it is because each party believes that the utility of the good being traded for is greater than that of the good currently held. Therefore, any trade must be subjectively viewed by each party as being advantageous to that party.

The notion of current market prices is fictional. Prices are neither current, nor of the market. Stock trades are historical events occurring between two parties and are unforecastable. What you can forecast is the potential success of a company going forward.

However, if you can evaluate a corporation’s underlying worth, then the potential for success is within reach. Yes, market conditions should always be considered. Nonetheless, well-chosen investments typically have a greater ability to weather short-term cycles, both in the stock market and the economy.

What is crucial is to develop the skills required to analyze historical data of a financial nature and then project forward a company’s potential success. This takes effort, sometimes considerable effort.

To reiterate a favorite theme repeated here many times, you should limit yourself to companies with years of uninterrupted increases in dividends. The reason is simple.

While dividends are not guaranteed and must be authorized by the company's board of directors, they help ensure that you will receive a certain minimum return. There are 267 companies that have been able to continually raise their dividends for a minimum of 10 consecutive years.

Annual dividend increases signify financial strength and solid conservative accounting. It is positive proof that the company respects its stockholders. However, simply compiling a list of companies that increase dividends annually is not enough. There are other guidelines that need to be considered if you are to have a high probability of success.

Continued corporate growth demands that a portion of a company's profits be reinvested each year in the business. A rule of thumb would be a dividend payout of no more than 40 to 50 percent of earnings, utilities excluded.

A company's debt burden must also be considered. For non-utilities, 25 percent of total capitalization is a reasonable number. Highly leveraged companies can run into difficulties if profits decrease during an economic downturn.

It is with this type of analysis that you can evaluate an investment with a cold eye and without trying to forecast market trends. 

Lauren Rudd is a Managing Director with Raymond James & Associates, Inc., member NYSE/SIPC. Contact him at 941-706-3449 or All opinions are solely those of the author. This material is provided for informational purposes only, is not a recommendation and should not be relied on for investment decisions. Investing involves risk and you may incur a loss regardless of strategy selected. Past performance is no guarantee of future results.