Daily Gains Letter

Why You Should Consider Old Economy Stocks for Your Portfolio

By for Daily Gains Letter | Jan 31, 2013

















DL_Mitchell_310113You know the old economy—the bricks-and-mortar economy—is back when Warren Buffett’s Berkshire Hathaway, Inc. (NYSE/BRK-A) is breaking new all-time record highs on the stock market. It’s been just over five years since Berkshire Hathaway set its previous all-time high in December 2007, just before the stock market started to turn after the subprime real estate bubble burst.

Countless old economy names are doing well in this stock market—a slow-growth environment with a lot of investment risk. Traditional blue chips are seemingly all the rage once again, and it’s great news for U.S. investors. Finally, the reset button has worked.

Technology stocks still have quite a way to go, but the NASDAQ Composite is working its way higher. Even with the stock market bubble in the late 1990s, if you eliminate this price spike from the long-term chart, you’ll see that the NASDAQ Composite has still done very well.

As we all know, timing is everything in the investment business. If you loaded up on technology stocks during the 1990s bubble, you’re still not above water. But I want to highlight a company that I view as old economy, the kind of blue chip consumer staple that we all know. The Procter & Gamble Company (NYSE/PG) is a brand-name company that pays a growing dividend to investors; you can use your dividend payment as income for dividend reinvestment in new shares. The company’s chart is below:

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Chart courtesy of www.StockCharts.com

As you can see from the company’s stock market chart, there have been periods when the stock was down for quite a while. Back in 2000, Procter & Gamble had an earnings miss, and as you can see, the stock lost half its value. It took five full years for this old economy company to recover on the stock market; all the while, it kept paying its quarterly dividends. But as this long-term chart illustrates, the company’s share price did recover after every major downturn on the stock market—and why? Because we all still used the company’s products on a daily basis. This is an old economy business with products that we need to consume.

There are countless examples of old economy stocks like Procter & Gamble that have excellent long-term track records on the stock market. And they are key; the most important way you can make a good deal of money from less volatile, old economy stocks is to employ dividend reinvestment. It is the compounding of dividends and shares that creates real wealth over time.

You might think old economy stocks are boring and unworthy of consideration. But consider this: Say you bought shares in a pharmaceutical company like Bristol-Myers Squibb Company (NYSE/BMY), an old economy stock in a mature industry. The stock market corrected, and you bought $10,000 worth of Bristol-Myers shares at the beginning of 2009. The simple return on your stock market investment from then until now is approximately 50%. That’s pretty good for an old economy stock. But if you took the company’s quarterly dividend payments and reinvested them into new shares through its dividend reinvestment program (DRIP), your return would accelerate to well over 80%. A couple more years, and you might get a 100% return by reinvesting the dividends in Bristol-Myers. That’s a big difference, and it’s the way to create real wealth using the stock market and blue chip companies that aren’t going to disappear tomorrow.

The old economy is back, and you can see it in the strength of industrial averages like the Dow Jones. So far this year, the Dow Jones Industrials are leading the other benchmarks, and I think it’s going to stay this way for a while. This is really good news for the U.S. economy.

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