A listener named Aaron was told by a friend that the only safe stocks are the dividend aristocrats. The dividend aristocrats are stocks in the S&P 500 that have increased their dividends for 25 straight years. Obviously these are high quality, large cap stocks, sometimes referred to as blue-chip stocks. They come from a variety of industries, and will typically have a track record of solid earnings and healthy balance sheets.
That does not, however, make them safe. Under no circumstances should you ever consider investing in a single stock “safe”. When you invest in a single stock, you assume what is called company risk. Company risk can be the single biggest risk factor in investing. Diversification is the way to mitigate company risk, and it is the single most important factor in what successful investors do. As we alway say, it is possible to get rich by under diversifying. It is not possible to stay rich by under diversifying.
To use a recent example of a dividend aristocrat, think about Chevron. As of Friday morning, Chevron had increased by over 36%. Sounds great, right? Well, if you go back to July 1st of 2014, Chevron is actually down 16% from that time. And from July 1st of 2014 to August 26th of 2016, Chevron was down over 45%! Does that sound like a “safe” investment to you?
There are so many examples out there of blue chip companies going through trying times. I don’t have time to address them all, but if you need more examples, look at what happened to Procter & Gamble in January of 2000 (I was working there at the time, but I didn’t cause that). More recently, look at Lowes, another dividend aristocrat. Over the last ten years, Lowes has increased by about 139%. During the same period, their non-dividend aristocrat competitor, Home Depot, has increased by 447%! Which one would you rather have owned?