10 Wonderful Blue-Chips My Retirement Portfolio Will Be Buying Aggressively During The Next Correction (2024)

(Source: Imgflip)

I'm well experienced with bubbles having quickly made a large profit and then losing it even faster in the tech bubble.

(Source: Lance Roberts)

Today, stocks like Apple (AAPL) continue to amaze and astound, with market cap stats that boggle the mind. Stats such as having a market cap that's almost 90% more than the combined value of America's 2,000 smallest companies.

(Source: Lance Roberts)

The five biggest tech giants now account for 26% of the S&P 500 and have a market cap that's equal to the smallest 394 companies in the index (each of which is at least $8.2 billion in size).

Apple is merely the most famous of the bubble stocks that represent potentially dangerous blue-chip investments that prudent long-term investors are wisely avoiding right now.

Now, there is an important difference between the tech bubble and today. Back in the mania of the late '90s, the concept of profitability was almost laughed at by many speculators.

"Price/eye-balls" was one example of the idiotic metrics that gamblers and momentum chasers were giving as excuses for why some greater fool would always pay a higher multiple on companies that, in many cases, had no plan for ever making money.

(Source: Ycharts)

In contrast, today's tech titans are minting virtual oceans of free cash flow, none more so that Apple.

However, while Apple's and its fellow "fantastic five" fundamental risks are low (their 30-year probability of bankruptcy ranges from 0.07% to 0.7% based on credit ratings), their valuation risk is very high.

Valuation risk is the most commonly ignored risk that investors make and often leads to very bad outcomes.

The Most Extreme Example Of Valuation Risk I've Ever Seen

(Source: F.A.S.T Graphs, FactSet Research)

NetApp (NTAP) is the first company I ever bought, back in the tech bubble. I foolishly paid 400 times earnings for a stock that would peak at 500 times earnings.

So overvalued what this company (about 3,100% historically overvalued) that anyone who bought at the top has lost 60% of their money, even after dividends and 20 years of 14% CAGR earnings growth.

That's almost 3X the growth rate of the S&P 500, yet investors who ignored valuation risk in 2000 will likely never live to break even.

Today's market is not quite as crazed and overvalued as the tech mania, but valuations are stretched, to say the least.

With the exception of earnings yield spread, the S&P 500, despite the worst economy in 75 years, is trading at 0.7 to 2.4 standard deviations above its historical valuations.

And I'm not talking about average multiples going back to 1871 when the US was an emerging market economy, but the last 25 years, the modern era that includes low inflation and low-interest rates.

In the short term, valuations have almost nothing to do with total returns (8% over 12-month periods according to JPMorgan), which is why bubbles can last for many years. However, ultimately high multiples invariably lead to lower and sometimes negative returns for many years.

JPMorgan estimates that stocks are likely to deliver slightly negative returns over the next five years.

S&P 500 Valuation Profile

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool, JPMorgan, F.A.S.T Graphs, FactSet Research, Brian Gilmartin, Reuters'/IBES/Refinitiv/Lipper Financial, Ed Yardeni, Multipl.com)

For context, during the height of the tech bubble, on March 24th, 2000, the S&P 500 hit a forward PE of 27.2, historically 66% overvalued.

S&P 500 Total Return Potential Profile

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool)

I'm not as bearish as JPMorgan about five-year forward returns, which I estimate at 3.2% CAGR with the market now 0.1% away from record highs.

Of course, a major and obvious risk stocks appear to be ignoring is that corporate taxes could go up from 21% to 28% in 2021. That is a 50% probability according to Morningstar, based on the analyst firm's current estimate of the November probable election outcome.

Goldman estimates that such a corporate tax cut could permanently reduce corporate earnings by 12%, resulting in far lower expected returns.

S&P Total Return Potential Profile If Corporate Taxes Go to 28%

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool)

Could stocks roar even higher? Absolutely, bubbles can last longer and reach levels that defy all common sense, which is the definition of speculative manias.

We may stall here for a while into the fall, … but I think you're going to get a rocket ship coming in the fall. I think the S&P is going to trade out above 4,000." - Jeffrey Saut

Raymond James analyst Jeffrey Saut thinks stocks could potentially soar 30% higher by the fall, which would mean stocks would approach, but not yet exceed the dangerously reckless valuations seen in early 2000.

• Q4 2020 to Q4 2021 EPS consensus: $156.03
• Forward PE of S&P 4000 at end of year: 25.6
• historical overvaluation: 56%
• tech bubble overvaluation: 66%

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool, JPMorgan, Bank of America, Princeton, Lance Roberts)

Stocks only have to trade at reasonable multiples of fundamentals in the long term, which is actually 10+ years. For several years, they can and often do become totally disconnected from fundamentals.

(Source: Imgflip)

The bottom line is that valuations are currently stretched to the greatest levels in 18 years. This has resulted in a lot of speculative bubbles that will almost certainly eventually end in tears for those who aren't lucky enough to lock in their profits before the music finally stops.

(Source: Imgflip)

Fortunately, for those interested in long-term prudent investing, rather than rampant speculation, bubbles always end, it's just a matter of timing and what catalyst causes sentiment to switch from risk-on to risk-off.

The more extreme the excesses become, generally the harder and faster stocks correct back to rational levels.

This brings me to the topic of this article, the 10 amazing blue-chips I look forward to backing up the truck on when the current euphoria finally ends.

10 Amazing Blue-Chips My Retirement Portfolio Will Be Buying With Both Hands During The Next Correction

I believe in maintaining a relatively balanced portfolio meaning never going "all in" on any one alpha-factor strategy.

Those would be strategies like value, low volatility, dividend growth investing, quality (defined by returns on capital), and momentum, which has dominated the past decade.

The very reason that alpha factors continue to work over time is that, for agonizingly long periods, they underperform. If one strategy worked all the time, eventually, momentum chasers would bid up valuations to tech bubble, or even Japan bubble extremes (forward PE of 60X in December 1989).

Instead, we get long periods of relatively weak returns resulting in endless momentum chasing into the next hot strategy.

(Source: Lance Roberts)

Value has historically outperformed growth stocks by 4.4% CAGR over the last 90 years. The current period of underperformance is the greatest in history, surpassing that of the tech mania and the Great Depression.

(Source: Imgflip)

Could this time really be different? John Templeton and Howard Marks, two of the greatest investors in history, said that 20% of the time permanent secular changes in economies and sectors do happen.

(Source: Lance Roberts)

But the "this time is different" idea overlooks the historical fact that when the relative performance of value and growth gets too extreme, then value tends to eventually overtake growth once more. Often in growth-fueled market crashes which are highlighted in blue in the above chart.

Why do I bring this up?

A few reasons.

1. alpha factors won't work if you don't have the discipline to ride out the inevitable and long periods of underperformance
2. market envy can lead to momentum chasing at extremely dangerous valuations
3. thus diversifying by style is prudent for most long-term investors

Dividend Sensei Phoenix Retirement Portfolio

(Source: Morningstar)

Here is what my retirement portfolio's Phoenix bucket asset allocation looks like.

Since I refuse to overpay for anything, 45% of my portfolio is classified as value by Morningstar.

Every day I buy $500 worth of the Dividend Kings Daily Blue-Chip Deal Video recommendation, which alternates between high-yield and low PEG/fast growth.

Thus, even in this growth bubble, I've managed to make 20% of my portfolio reasonable/attractively priced (when I bought them) growth stocks. 55% of my portfolio is non-value stocks and during the next correction, I and Dividend King portfolios plan to maintain that balance between yield and growth.

Dividend Kings Correction Plan

No one knows what will happen in the next correction.

If this bubble does go truly parabolic, something like that mythical rally to 4,000 by the fall, then the next correction MIGHT see value stocks, including my favorite high-yield blue-chips, actually go up.

Some Value Stocks Went Up During The Tech Crash

(Source: YCharts)

This is why it's prudent to have two lists of high conviction blue-chips, high-yield (generally the most undervalued), and fast growth/low PEG.

I've selected the top five from each list, taken from the Dividend Kings Phoenix List, which is driving all seven of our portfolio buys in this recession (including my retirement portfolio).

5 High-Yield SWANs I Hope To Buy In The Next Correction

In most corrections, almost all stocks fall, so the highest yielding blue-chips today will likely offer even more mouthwatering safe dividends.

1. Enterprise Products Partners (EPD) (Uses K-1 Tax form): 9.6% yield, 5/5 dividend safety, 11/11 quality Super SWAN
2. Altria (MO): 8.0% yield, 4/5 dividend safety, 9/11 blue-chip dividend king (51-year dividend growth streak)
3. British American Tobacco (BTI): 7.7% yield, 4/5 dividend safety, 9/11 blue-chip quality
4. Pembina Pipeline (PBA): 6.9% yield (paid monthly), 5/5 dividend safety, 10/11 SWAN quality
5. Enbridge (ENB): 6.8% yield, 5/5 dividend safety, 11/11 Super SWAN quality

Dividend safety scores are calibrated based on the average historical S&P 500 dividend cut during recessions.

(Source: Moon Capital Management, NBER, Multipl.com)

I then multiple the average dividend cut risk by the 4 to 6X greater magnitude of this recession (blue-chip economist consensus).

Why these five companies in particular? Other than the mouthwatering yields, it's their very strong fundamentals and superior dividend safety that earns these five top spots on my correction watchlist.

Fundamental Stats On These 5 Ultra-Yield SWANs

• Average quality score: 10.0/11 SWAN quality vs. 9.6 average dividend aristocrat
• Average dividend safety score: 4.6/5 very safe vs. 4.5 average dividend aristocrat (about 2.5% dividend cut risk in this recession)
• Average FCF payout ratio: 69% vs. 84% industry safety guideline
• Average debt/capital: 53% vs. 60% industry safety guideline vs. 37% S&P 500
• Average yield: 7.8% vs. 1.8% S&P 500 and 2.2% aristocrats
• Average discount to fair value: 33% vs. 41% overvalued S&P 500
• Average dividend growth streak: 21.2 years vs. 41.8 aristocrats, 20+ Graham Standard of Excellence
• Average 5-year dividend growth rate: 8.8% CAGR vs. 8.3% CAGR average aristocrat
• Average long-term analyst growth consensus: 4.6% CAGR vs. 6.4% CAGR S&P 500
• Average forward P/E: 8.5 vs. 23.2 S&P 500 vs 15 Graham/Dodd/Carnevale rule of thumb for "reasonable and prudent" investments = pricing in zero growth forever according to Graham/Dodd fair value formula
• Average earnings yield (Chuck Carnevale's "essence of valuation": 11.8% vs. 4.3%% S&P 500
• Average PEG ratio: 2.11 vs. 3.15 historical vs. 2.73 S&P 500
• The average return on capital: 383% (81% Industry Percentile, High Quality/Wide Moat according to Joel Greenblatt)
• Average 13-year median ROC: 286% (relatively stable moat/quality)
• Average five-year ROC trend: -4% CAGR (relatively stable moat/quality)
• Average S&P credit rating: BBB vs. A- average aristocrat (7.5% 30-year bankruptcy risk)
• Average annual volatility: 24.7% vs. 22.5% average aristocrat (and 26.3% average Master List company)
• Average market cap: $58 billion large-cap
• Average five-year total return potential: 7.8% yield + 4.6% CAGR long-term growth + 8.3% CAGR valuation boost = 20.7% CAGR (10% to 32% CAGR with an appropriate margin of error)
• Average probability-weighted expected average five-year total return: 6% to 25% CAGR vs. 1% to 6% S&P 500
• Average Mid-Range Probability-Weighted Expected 5-Year Total Return: 15.5% CAGR vs. 3.2% S&P 500 (360% more than S&P 500)

The quality and value proposition of these five ultra-yield SWAN stocks is clear from their

• well-covered dividends
• safe debt levels
• good credit ratings
• 8.5 average PE/price to cash flow (literally anti-bubble stocks)
• 15.5% CAGR probability-weighted expected returns, which is nearly 5X that of the S&P 500

Probability-Weighted Return Calculator

(Source: Dividend Kings Investment Decision Tool)

These five companies are already very strong potential long-term investments today, but in a correction, they might potentially become even more attractively undervalued.

Investment Decision Scores

I never buy or recommend any company without first running it through the Dividend Kings Investment Decision tool. This compares any potential investment (for dividend or growth stocks) against the S&P 500, most people's default alternative.

I use valuation and the three core principles of prudent long-term investing to see how sound a potential investment is today.

• Valuation: 4/4 33% undervalued = potentially very strong buy
• Preservation Of Capital 5/7 BBB stable credit rating, 7.5% or less long-term bankruptcy risk
• Return Of Capital: 7.8% yield and 4.6% CAGR growth = 8.8% 5-year average yield on cost = 43.9% 5-year dividend return vs 10.5% S&P 500 (322% better) = 10/10
• Return On Capital: 15.5% PWR vs 3.2% S&P 500 (360% more) = 10/10
• Relative Investment Score 94% vs 73% S&P 500
• Letter Grade A excellent vs S&P 500 C (market-average)

5 Ultra-Value SWAN Investment Decision Score

(Source: Dividend Kings Investment Decision Tool)

These five ultra-yield SWANs are already among the best potential income growth investments prudent investors can make. Their scores won't actually go up in a correction, only their dividend and total return potentials will.

But the ability to potentially lock in an average yield of 9% or even potentially 10%? Well, that's the stuff that dreams...and prosperous and secure retirements are made of.

5 Hyper-Growth SWANs I Hope To Buy In The Next Correction

If the current growth bubble gets big enough, then the most popular stocks of today could quickly turn into the most hated names of tomorrow. This means I may be able to finally buy more of these strong growers at reasonable to attractive valuations.

1. Amazon (AMZN): 36.6% CAGR long-term growth consensus, current PEG 1.05, currently 23% overvalued, DK rating "hold"
2. Universal Display (OLED): 28.6% CAGR long-term growth consensus, current PEG 2.49, currently 7% overvalued, DK rating "hold"
3. Alibaba (BABA): 25.0% CAGR long-term growth consensus, current PEG 1.19, currently 7% undervalued, DK rating "potential reasonable buy"
4. Applied Materials (AMAT): 19.6% CAGR long-term growth consensus, current PEG 0.89, currently 28% overvalued, DK rating "hold"
5. Lowe's (LOW): 17.1% CAGR long-term growth consensus, current PEG 1.38, currently 38% overvalued, DK rating "potential sell/trim"

What do I like about these five companies? Other than the rapid expected growth and already mostly reasonable PEG ratios (which will likely fall a lot further in a correction)?

Fundamental Stats On These 5 Hyper-Growth SWANs

• Average quality score: 10.4/11 SWAN quality vs. 9.6 average dividend aristocrat
• Average dividend/balance sheet safety score: 5/5 very safe vs. 4.5 average dividend aristocrat (about 2.5% dividend cut risk in this recession)
• Average FCF payout ratio: 26% vs. 57% industry safety guideline
• Average debt/capital: 37% vs. 40% industry safety guideline vs. 37% S&P 500
• Average yield: 0.8% vs. 1.8% S&P 500 and 2.2% aristocrats
• Average discount to fair value: 18% overvalued vs. 41% overvalued S&P 500
• Average dividend growth streak: 21.0 years vs. 41.8 aristocrats, 20+ Graham Standard of Excellence
• Average 5-year dividend growth rate: 18.5% CAGR vs. 8.3% CAGR average aristocrat
• Average long-term analyst growth consensus: 24.7% CAGR vs. 6.4% CAGR S&P 500
• Average forward P/E: 35.4 vs. 23.2 S&P 500 vs 15 Graham/Dodd/Carnevale rule of thumb for "reasonable and prudent" investments
• Average earnings yield (Chuck Carnevale's "essence of valuation": 2.8% vs. 4.3%% S&P 500
• Average PEG ratio: 1.4 vs. 1.19 historical vs. 2.73 S&P 500
• The average return on capital: 105% (87% Industry Percentile, High Quality/Wide Moat according to Joel Greenblatt)
• Average 13-year median ROC: 93% (improving moat/quality)
• Average five-year ROC trend: +14% CAGR (improving moat/quality)
• Average S&P credit rating: A vs. A- average aristocrat (0.7% 30-year bankruptcy risk)
• Average annual volatility: 37.7% vs. 22.5% average aristocrat (and 26.3% average Master List company)
• Average market cap: $1.46 trillion mega-cap
• Average five-year total return potential: 0.8% yield + 24.7% CAGR long-term growth - 3.3% CAGR valuation boost = 22.2% CAGR (11% to 34% CAGR with an appropriate margin of error)
• Average probability-weighted expected average five-year total return: 6% to 27% CAGR vs. 1% to 6% S&P 500
• Average Mid-Range Probability-Weighted Expected 5-Year Total Return: 16.7% CAGR vs. 3.2% S&P 500 (393% more than S&P 500)

Note that these five hyper-growth SWANs are truly among the elite of growth companies.

• returns on capital in the top 13% of their industries AND rising rapidly over the last five years
• average credit rating is A, one notch higher than dividend aristocrats, 0.7% 30-year bankruptcy risk
• 21-year average dividend growth streak (the ones that pay dividends)

(Sources: Dividend Kings Investment Decision Tool, S&P, University of St. Petersburg)

Their consensus growth rates are so fast that even 18% overvalued the probability-weighted expected return is slightly higher than the five ultra-value SWANs.

So, why not just buy these five today? Because the essence of prudent long-term investing, as opposed to speculating, is to always be appropriately compensated for the risk of something going wrong with the business.

(Source: Imgflip)

What if these companies don't achieve their expected growth rates? The average market-determined historical fair value is about 29 PE for these five.

That's a reasonable valuation to pay for companies growing about 25% CAGR. But what if something happens to knock that growth down to 20%, 15%, or even single digits?

Multiple contractions could then make what seems like a "slam dunk" investment today, a major mistake in hindsight.

(Source: Imgflip)

Or as Buffett might say, the facts around these five hyper-growth stocks seem attractive, and our reasoning may be right that buying the highest quality growth names on earth is likely to make us money over time.

But in addition to our facts (which will change in the future, possibly in our favor but possibly not), and reasoning being right, we also need strong risk management.

Such as demanding an appropriate discount to fair value, i.e. "margin of safety" to compensate for the risks of things going wrong.

Peter Lynch, John Templeton, and Howard Marks noted that 20% to 40% of the time analysts are just completely wrong about how fast a company will grow. That's even when adjusting for historical margins of error for analyst forecasts.

• Average historical PE for these five companies: 29.0
• Potentially good buy price (10% margin of safety): 26.1
• Average PEG at a potentially good buy price (in a correction): 1.06 vs 1.19 historical average

Dividend Kings Rating Scale

For SWAN quality companies, I will never buy unless I can get a 10% or better discount to average historical fair value (based on up to nine fundamental valuation metrics).

The good news is that I was able to buy all of these companies during the recent bear market, and even the most popular bubble stocks eventually become undervalued again.

Hyper Growth But Highly Volatile

(Source: YCharts)

The average 15-year annual volatility of these five is 37.7%, and as you can see, some have historical annual volatility of 54%.

In a correction, they could easily go from 18% overvalued to about 20% undervalued, and thus, go from a collective "hold" to a potentially strong buy.

Investment Decision Scores

• Valuation: 2/4 18% overvalued = hold
• Preservation Of Capital 7/7 A stable credit rating, 0.7% or less long-term bankruptcy risk
• Return Of Capital: NA, 1.5% or less yield = growth stock
• Return On Capital: 16.7% PWR vs 3.2% S&P 500 (393% more) = 10/10
• Relative Investment Score 90% vs 73% S&P 500
• Letter Grade A- very good vs S&P 500 C (market-average)

(Source: Dividend Kings Investment Decision Tool)

Even overvalued, these five hyper-growth SWANs are a potentially good investment.

But in a correction, their high volatility could easily send them down to their good buy prices. That would make them 100% A+ exceptional investments, basically as close to perfect growth stocks as exist on Wall Street.

Bottom Line: Don't Curse The Bubble, Prepare For Potentially Great Deals During The Coming Correction

My approach to investing is based on two quotes from legendary investors whose disciplined approach to capital allocation made their investors tens of billions over the decades.

(Source: Imgflip)

I'm looking to either buy a blue-chip at a deep discount, but I'm also eager to buy a SWAN or Super SWAN quality company at a reasonable price.

(Source: Imgflip)

Today EPD, MO, BTI, PBA, and ENB aren't just deep value blue-chips, they are wonderful ultra-yield/anti-bubble SWAN quality companies priced for literally zero growth.

Buying any of these five is a potentially excellent long-term idea, as long as you remember to own them in a diversified and prudently risk-managed bunker SWAN portfolio like this one.

• Build The Ultimate Sleep Well At Night Retirement Portfolio With These 15 High-Yield Blue-Chips

In contrast, AMZN, OLED, BABA, AMAT, and LOW currently range from modestly undervalued (Alibaba), to very overvalued (Lowe's). While it might end up being a potentially very good idea to buy all five today, the essence of successful investing is sound risk management.

(Source: AZ quotes)

The future is never certain, which is why momentum chasing and short-term trading in a speculative bubble is so dangerous.

In contrast, prudent long-term investors never have to pray for luck, because through patience and discipline, they create their own.

It may be hard to believe today, but all the popular bubble stocks will EVENTUALLY return to fair value and likely become undervalued again.

The timing of that event will vary by company, but for those who understand how true long-term fortunes are made, that doesn't matter.

If you're ever tempted to chase momentum out of FOMO (fear of missing out), remember what Lance Roberts recently said.

Markets always, without exception, revert to the mean. The only question is the "timing" of the event. - Lance Roberts

If you wish to gamble with a small amount of your savings, say 5% to 10%, and that keeps you from taking excessive risk with the rest of your nest egg, then go with God, and best of luck to you.

But never forget the famous words of the greatest long-term investor in history.