💸 Selling Everything Else to Chase AI
Today is Dividend Day.
The series where I teach you 5 things about dividend investing in less than 5 minutes.
1️⃣ Defensives Are Cheap
The image shows the relative valuations of Tech stocks and Defensive stocks.
Defensive stocks usually include things like:
Consumer Staples: Companies that produce everyday necessities like food, beverages, household goods, and personal hygiene products
Healthcare: Pharmaceutical companies, medical device manufacturers, and healthcare providers.
Utilities: Companies that provide essential, heavily regulated infrastructure like water, electricity, and natural gas.
So you can think of Defensive stocks in this image as dividend payers.
The last time they were this cheap was 2000.
2️⃣ Selling Everything Else to Chase AI
Here’s what the image below shows:
The Left: Semiconductors (the AI trade) are shooting up, now making up nearly 20% of the S&P 500
The Right: The weight of everything else in the S&P 500 is collapsing
Here is what is happening: Investors selling off anything that isn’t AI to chase AI hype.
That means they’re dumping established, cash-flowing businesses, like the cheap, defensive dividend payers from Point 1.
Not because there’s anything wrong with these companies, but just to speculate on AI.
3️⃣ An Investing Quote
It’s tempting to chase the crowd when it seems like everyone is making money but you.
But Howard Marks reminds us that’s usually the exact wrong thing to do.
"Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge."
-Howard Marks
4️⃣ Guide To The Markets
Popular stocks and sectors trade at higher prices.
Higher prices lead to lower returns in the long run.
The image below is from JP Morgan’s Guide to the Markets.
They just released the newest version, which you can get here.
5️⃣ Example of a Dividend Stock
Let’s look at a classic defensive stock: Kimberly-Clark ($KMB).
Kimberly-Clark makes money by selling essential, paper-based consumer staples like Huggies diapers, Kleenex tissues, and Kotex feminine hygiene products.
These products are everyday necessities that consumers purchase repeatedly, providing the company with highly predictable, recurring cash flow.
Key numbers from Fiscal.ai:
Profit Margin: 9.4%
Forward PE: 15.1x
Dividend Yield: 4.5%
Payout Ratio: 79%
Used sources
Interactive Brokers: Portfolio data and executing all transactions
Fiscal.ai: Financial data
Disclaimer
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This was a great quick read on how some solid businesses are being undervalued because of the increased demand for AI stocks. Thanks for sharing your insights!