Fiscal cliff, shmiscal cliff. When it comes to investing, you can either sweat over the day’s news and what it might mean for your stocks, or you can choose investments that will thrive, or at least not cause you horrific losses, no matter what the course of current events.
Blue-chip stocks offer one such solid bet. Large companies with durable business models and sustainable competitive advantages should continue to grow and pay dividends even if the market takes a turn for the worse.
Consider Johnson & Johnson. A majority of its products are No. 1 or No. 2 in their fields, and the company has increased its dividend in each of the past 50 years. Or take International Business Machines, which has generated higher free cash flow (the cash profit left over to pay dividends, buy back shares and make acquisitions) in each of the past nine years and which gets about 65 percent of its revenues overseas. Such stocks tend to be less volatile than those of less-established firms. And many sport lower price-earnings ratios than the overall stock market.
Many fine funds invest in blue-chip stocks, including two members of the Kiplinger 25. Fidelity Contrafund (symbol FCNTX), managed by the estimable Will Danoff, invests in blue chips in part out of necessity. With $82.2 billion in assets, Danoff needs to target big firms to put his cash to work efficiently. He likes to let winners run, which means his top holdings read like a who’s who of shining stocks. Contrafund is the largest mutual fund investor in Apple, Google and Berkshire Hathaway’s Class A shares, which represent its three largest positions. The fund achieves broad diversification (it held some 364 companies at last report) without behaving like an index fund. Its 9.5-percent annualized return over the past ten years beat Standard & Poor’s 500-stock index by an average of 2.5 percentage points per year.
By contrast, Vanguard Dividend Growth (VDIGX) targets blue chips by design. Manager Donald Kilbride seeks companies that he thinks will raise dividends in the future. That leads him to firms that generate predictable streams of cash and that are run by executives who have demonstrated a commitment to boosting payouts. The fund, which yields 2.2 percent, charges below-average annual expenses of 0.31 percent. Since Kilbride took the helm in February 2006, the fund has returned 6.3 percent annualized, compared with 3.4 percent for the S&P 500.Elizabeth Ody is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to email@example.com. And for more on this and similar money topics, visit www.Kiplinger.com.