Dividend Stocks Shining Through These Foggy Times?

By: ispeculatornew
Date posted: 08.09.2011 (5:00 am) | Write a Comment  (0 Comments)

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In times of panic such as the last few days, many investors start to panic which makes it very difficult to see a clear picture. Are all stocks going to $0? Is everything about to blow up? After days when markets lost over 6%, such questions become more common. I think the picture on the right gives a good idea of how difficult it can become to do the right moves. In times like these, some assets become mispriced giving investors with a lot of cash reserves great opportunities.

An example? Right now, many investors in panic are flowing to US government bonds, taking prices to insane levels. How so? For example, let’s compare these 2 investments at today’s prices:

10 Year US Government bonds – Interest rate 2.56%
S&P500 Index – Trading at 12 times its 2011 earnings with a dividend yield of 2.62%

As we wrote about a few weeks ago, companies are not only still increasing profits but they have strong balance sheets and are increasing dividend payouts much more than the opposite. That is unlikely to change so why would more investors not flow to high quality sustainable dividend stocks?

Don’t Try To Time It

The trickier part of course is trying to time the market and I would not even try. The market might decline another 5-10% and maybe even more but trying to buy at the bottom will require a lot of luck and most likely lead you to miss the opportunity. I personally prefer holding high quality dividend stocks that pay a higher dividend yield and hold a lot of cash than buying a 10 year government bond.

Companies such as Intel (INTC) and Microsoft (MSFT) trade at P/E ratio of 10 or so, with dividend yields that are already near those levels and increasing almost every year. It’s just a no brainer in my opinion.

Cash Is King

Of course, these are the days when cash is king. Borrowing can become difficult and selling other assets in order to buy undervalued stocks is not easy in times of panic. This is one big reason why keeping cash is important; it makes it easier to act quickly without depending on anything else when opportunities such as the current one arise.

What are your thoughts on current valuations of dividend stocks when compared with now downgraded US debt?

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