The Williams Plan for the Young Investor

The Trading Desk of a Financial Firm

In 1976, I developed what I called the Williams Plan. That plan took advantage of dividend paying stocks. Many people invested in portfolios designed to take advantage of dividend, often combining solid companies that pay a slightly above average dividend with some more risky, higher paying stocks in order to “juice” the overall yield. Most of these stocks are utility companies.

The problem with that strategy was made clear on May 22^nd, when Bernanke first started talking about tapering. Dividend payers, especially those with high yields, got crushed when the prospect of a higher interest rate environment emerged. Master Limited Partnerships (MLPs) such as Mark West Energy (MWE) brought home this point. MWE and other MLPs don’t pay interest as such. They distribute nearly all profit to shareholders meaning that they have a high payout ratio. The high on the MWE chart was achieved on May 22^nd and the stock dropped around 15% in the following month before recovering a little in the last few weeks. Other high yielding stocks followed the same pattern.

Chimera Investment (CIM) is a mortgage REIT. This stock also dropped around 15% in the month following Bernanke’s announcement. Once again, it has since bounced back in the direction of recovery.

Daniel and David will be ready to use their investments in 10 to 15 years. The objective, money for books, transportation, eating expenses, and lodging at a trade school, college, or university. 

If you did add these or similar high yielding stocks to your portfolio in order to bump up overall yield, you should consider using this bounce back to sell them. But if you are using the Sharebuilders Plan to reinvest dividends and invest more cash over a 10 year or more period, then I think you should stay with your program.

 The initial move down was on the possibility of something. When that something actually happens, and most believe it will, the drop is likely to be repeated. Add to this the possibility that the dividend paid could be cut. It is hard to escape the feeling that, for now at least, high yielding instruments such as mortgage REITs and MLPs are in interest rate risk trouble.

The higher quality dividend payers that you own, however, should be held on to. These are companies with moderate or low payout ratios (85% or below). In a stock market correction, high quality dividend paying stocks are likely to outperform most categories. Many have a history of growing their dividend over time. I agree; not only does this give an indication of a solid, growing company; it also protects the percentage yield against inflation.

Stocks such as Exxon Mobil (XOM), General Electric (GE) and Procter and Gamble (PG) may not be exciting, but yields of 2.69%, 3.1%, and 3.0% percent respectively are decent given the safety of the company. They should hold their own in rising inflation and interest rates.  XOM also has a dividend growth rate of 13%, according to VectorVest. GE and PG are good investments with 8% and 12% respectively. Even after inflation, this results in increased income each year.