Wednesday, March 27, 2013

How to invest when the market is at all time highs?

With the market at all-time highs, many quality income stocks are getting close to being overvalued. As a result, many investors are tempted to postpone new purchases until there is some sort of a correction. While many household names like Coca-Cola (KO) are fully valued at the moment however, there are many othe companies which are trading at attractive valuations. These of course are not the rock bottom valuations we saw in late 2008 and early 2009, but nevertheless represent cheap entry points for enterprising dividend investors.

Dividend investors always have to be selective, and on the lookout for common stocks that are attractively priced. Entry price does matter, because overpaying for stocks could lead to subpar returns in the first five to ten years of the investment. Investors who purchased Coca-Cola (KO) or Wal-Mart (WMT) during the 1999 – 2000 didn’t register much in price returns for at least a decade, and the only return came in the form of dividends. On the other hand, having a large cash position that sits idle for over a year does not contribute to the financial goals of the would-be retiree. The investor is missing out on the long-term compounding of the growing distributions that the dividend machines which can be purchased with that idle cash could have provided for them.

Back in 1999 the US markets as a whole were much overvalued. It was difficult to find quality income stocks to buy. However, there were many pockets of opportunity for selective dividend investors. Many REITs were offering compelling valuations, and so were some financial companies like Bank of America (BAC) for example. Many tobacco companies such as Phillip Morris, were severely beaten down because of the bad press tobacco was getting. Of course the Phillip Morris of 1999 is now Altria (MO), Phillip Morris International (PM), Kraft Foods (KRFT) and Mondelez International (MDLZ) for historical references. This is as an example to say that there are always pockets of opportunity for the trained eye, even in a market that is pushing new highs every single day.

There are plenty of pockets of opportunity in the current market environment as well. I spent a few minutes going through the dividend champions list using my entry criteria. I came up with the following quick list of cheap but promising dividend stocks:

Symbol
Name
Price
Yrs Div Increase
P/E
Dividend Payout Ratio
10 yr Dividend Growth
Yield
DGI Portfolio
(MCD)
McDonald's Corp.
99.27
36
18.52
57%
28.43%
3.10%
Yes
(AFL)
AFLAC Inc.
51.85
30
8.49
23%
19.27%
2.70%
Yes
(WMT)
Wal-Mart Stores Inc.
74.28
39
14.8
37%
18.10%
2.53%
Yes
(WEYS)
Weyco Group Inc.
24.18
31
13.98
39%
14.75%
2.81%
No
(APD)
Air Products & Chem.
87.52
31
15.67
46%
11.79%
3.20%
Yes
(PG)
Procter & Gamble Co.
77.27
56
17.54
51%
10.84%
2.91%
Yes
(CVX)
Chevron Corp.
121.18
25
9.1
27%
9.63%
2.97%
Yes
(XOM)
ExxonMobil Corp.
89.29
30
9.21
24%
9.01%
2.55%
No
(EFSI)
Eagle Financial Services
22.4
26
11.43
37%
8.60%
3.21%
No
(SRCE)
1st Source Corp.
24
25
11.9
34%
7.27%
2.83%
No
(CTBI)
Community Trust Banc.
34.27
32
11.86
44%
7.03%
3.68%
No
(UGI)
UGI Corp.
37.6
25
19.84
57%
6.94%
2.87%
No
(GPC)
Genuine Parts Co.
77.4
57
18.7
52%
5.30%
2.78%
No
(ABM)
ABM Industries Inc.
21.94
46
18.66
51%
4.88%
2.73%
No


The companies above are not automatic buys, but merely ideas for further research. Investors should focus on building a portfolio of quality income stocks patiently, by allocating funds every month. One should layer their dividend portfolio brick by brick, which would bring solid foundation for long term results.

This exercise should show investors that there are attractively valued income stocks even while markets are trading at all time highs, and most of the usual suspects like Coca-Cola (KO) for example are fully valued. By maintaining an open mind, and having the willingness to perform an independent search for companies for further research, an investor should be able to capitalize on attractive opportunities throughout all market cycles.

Full Disclosure: Long KO, WMT, APD, AFL, CVX, MCD, PG,

Relevant Articles:

Does entry price matter to dividend investors?
Buy and hold dividend investing is not dead
Three stages of dividend growth
Warren Buffett on Dividends: Ideas from his 2013 Letter to Shareholders
Dividend Investors Should Focus on Valuation, not just dividend yield

3 comments:

  1. Great blog today!! I was thinking about this topic for the last few weeks, and you addressed it. When building your portfolio brick-by-brick, do you look at how transaction costs and taxes impact your strategy?

    ReplyDelete
  2. DGI,

    Very good topic. Actually, I have been building positions in AFL recently as well as TGT and DOV. These are nearly complete now and I've been looking at PH for some time now too. In a comment on ColdCache's question, I only pay attention to tax implications in that I am trying to place higher paying dividend stocks in tax advantaged accounts. For reasons I won't go into, this does not always work the way I want. My transaction cost is under ten dollars so I generally disregard it, but tend to never invest less than a thousand dollars if I can help it.

    By the way, I've held Altria (MO) since 1999 and hold all the spin-offs too. It's been a great ride with Big MO!

    A

    ReplyDelete
  3. Another great article.

    Do you save up the $1000 before making the stock purchase?

    I started doing dollar cost averaging, buying small shares each month. The transaction fees changed my mind quickly from this approach. Now, I save up $500 and make a purchase when the stock is down.

    ReplyDelete

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