I have two ironclad investment rules.
The first is that the investment must have an income component.
It must pay dividends, distributions, interest, royalties, or rents. It has to pay something to me, and pay it on a schedule.
The income component need not be high yield. It can be low yield – 1% will suffice for a reputable growth stock.
You might think my rule necessarily precludes the popular non-dividend growth stocks of the day: Amazon (NASDAQ: AMZN), Meta Platforms (NASDAQ: META), Tesla (NASDAQ: TSLA), and others, for instance.
But I have a loophole.
Many non-dividend stocks are enveloped in an ETF or a mutual fund that pays a dividend.
For example, the stocks mentioned above are components ofiShares Russell Top 200 Growth ETF (NYSEArca: IWY), which yields around 1%.
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You might protest: Insisting on income means missing the hyper-growth opportunities possible in the new AI technology.
I’ll likely miss many of the hyper-growth, AI speculative stocks that are the rage today.
Many are sure to surge 400%, 500%, and 1,000% over the next couple of years.
True enough, but as many, and probably more are destined for zero over the next couple of years.
After all, how are those cannabis stocks, SPACs, work-from-home stocks, and cryptocurrencies working? And those manias all occurred within the past five years.
Income is tangible. It is proof of business legitimacy. At the same time, income helps me maintain focus and remain on the straight-and-narrow.
Yes, I’ll miss something on the upside, but I’ll miss a heckuva lot more on the downside.
My ironclad buy rule dovetails into my ironclad sell rule.
When the income is cut, the investment is sold. No questions asked.
Dividend cuts, in particular, are worth heeding.
Management will cut the dividend and then attempt to limit the damage to the share price. Management will chat up a world of wondrous opportunities that await now that the company no longer pays a dividend.
Don’t believe the blather.
The data prove otherwise.
The following chart shows that the BEST stocks are dividend growers and initiators.
These are companies that are paying a dividend for the very first time – or they have a history of increasing their payments.
Dividend cutters and eliminators are the worst investments you could own.
Indeed, a portfolio of nothing but S&P 500 dividend cutters and eliminators would have generated a loss if held as a long-term investment (50 years in the above graph).
You could have bought an S&P 500 index fund and timed all your purchases at market peaks, and you would have fared far better. You would have made money.
I have few ironclad rules because investing is as much art as science. Each investment is unique.
But over my 35-year investing career, these two ironclad rules have served me well. So, no regrets.
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Full Disclosure: I own the IWY ETF.