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By The Sizemore Letter

In the interests of brevity, I can make the answer short.

No. There is not a bubble in dividend-paying stocks.

This is not to say that defensive sectors of the market are not modestly overpriced relative to more cyclical sectors or that, when faced with paltry rates on bonds, some investors have not taken to chasing yield where they can find it. Dividend-paying stocks have certainly outperformed their non-dividend-paying sisters in 2012, and some dividend-focused indexes—such as the S&P Dividend Aristocrats—sit near all-time highs even while the rest of the market sells off.

But suggesting that there is a “bubble” in dividend investing implies that shares are drastically overpriced or that investors have wild, unrealistic expectations of future profit. In looking at a sample of American blue chips that often come up dividend screens, it is hard to make such a case.

Let’s start with that most iconic of American companies Coca-Cola ($KO). Coke is a special case because it is both a high current-dividend stock and a serial dividend grower. In addition to being one of Warren Buffett’s largest holdings, Coke is a constituent of the popular Dow Jones Select Dividend Index ETF ($DVY) and the Vanguard Dividend Appreciation ETF ($VIG). Long suffering readers will remember that VIG, which requires its stock holdings to have at least 10 years of consecutive dividend increases, is my favorite ETF for long-term portfolio growth and a core holding of my ETF portfolios.

Coke trades for 17 times estimated 2013 earnings. To be sure, this is more expensive than the 13 times earnings of the broader S&P 500. But for a company of Coke’s quality and safety, it would hardly seem excessive. Coke may not be a screaming buy at current prices, but it would hardly seem overpriced.

The story is much the same among other popular dividend-paying blue chips. Johnson & Johnson ($JNJ), Wal-Mart ($WMT) and Procter & Gamble ($PG) trade at 12, 13, and 16 times 2013 estimated earnings, respectively. Again, this hardly suggests nosebleed valuations on the verge of crumbling.

Moreover, the investors piling into these stocks are not doing so in hopes of getting rich quick. This is not 1990s tech mania or 2000s condo flipping. Their goals are far more modest; they are looking for stable and consistent dividend growth that will outpace inflation over time.

When the market shifts back into “risk on” mode, every stock and ETF I’ve mentioned thus far in this article will likely underperform the broader S&P 500.

This is, of course, a problem for professional money managers who use the S&P as their benchmark. But individual investors—and particularly those in or near retirement—care much less about relative performance and far more about generating a stable income that does not depend on portfolio drawdowns.

It is ironic; while Wall Street has become more of a casino than ever in recent years, investors have become far more reluctant to risk their retirement to the whims of the market. Twelve years of very difficult market conditions have taught them that capital gains can be fleeting and that depending on them is a gamble they can’t afford to take.

This change in sentiment is not an incipient bubble, but I believe it is a long-term regime shift in investor preference that should be welcomed. I hope it lasts.

As investors demand higher yields, company boards will eventually acquiesce and give them what they want. They certainly have the capacity to do so. According to Howard Silverblatt, Standard & Poors’ research guru, the dividend payout of the companies of the S&P 500 is only 32% of earnings. This compares to a historical average of 52%.

This is an unambiguous good. The payment of a dividend has a way of focusing management attention and discouraging wasteful empire building. It aligns management with the preferences of long-term investors rather than short-term speculators. And in an age of scandals, dividends, unlike paper earnings, cannot be fabricated.

All of this reverses the trends of the past half century that spawned the cult of equity.  And again, it should be welcomed.

Disclosures: Sizemore Capital is long DVY, JNJ, PG, VIG, and WMT. This article first appeared on MarketWatch.

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Related posts:

• European Dividend Stocks: What You Need to Know
• Jeremy Grantham’s Top 5 Dividend Stocks

By The Sizemore Letter

One evening two years ago, I logged in to Facebook ($FB) to upload new photos of my son (if memory serves, he was bouncing in a Jumperoo) and I got an announcement that John had just planted corn on some videogame I had never heard of. 

Why anyone would have found that piece of information interesting was beyond my comprehension, but before I finished uploading my photos I had received no fewer than nine other status updates.  James milked a cow.  Irene made plum wine.  Kate built a barn.  And all of them were requesting that I join them on Farmville. 

In the weeks that followed, I changed my Facebook settings multiple times to block the status updates, but they somehow found a way to keep coming.  It was a losing battle.  I finally succeeded in blocking Farmville, but then I started getting invites for CastleVille and CityVille.  Susan just built a skyscraper.  Great.

I defriended the worst offenders and changed my settings…again.  And yet they still kept coming. 

When I found myself fantasizing about committing horrendous acts of violence against the makers of these videogames, I decided it was best for my mental health to quit using Facebook altogether. 

I tell this story for a reason.  My blind hatred of Zynga ($ZNGA) and its games made trading the stock a bad idea.  Yes, I missed a great short opportunity, but sitting this one out was the right thing for me to do.  When you lose emotional control, you lose objectivity.  And there is no faster way to ruin yourself in the capital markets. 

Fear and greed drive markets, but don’t forget how powerful an emotion hate can be as well.  When you are able to maintain emotional detachment—embracing your inner Spock, if you will—you can trade the emotional impulses of others in a contrarian strategy.  But when you find yourself legitimately hating a stock as if it were an old enemy with whom you have a blood feud, you’re no longer thinking rationally.  You’re not looking at the numbers, and you’re setting yourself up for failure. 

Think about talented short sellers you have met, traders who have been in the business a long time.  You will never hear them say things like “I hate this stock” or “I want this to fall.”  They keep a level head and stick to their trading rules, or they don’t survive long in that business.

Emotional detachment is equally important on the long side, of course.  I consider Peter Lynch’s advice to “buy what you know” to be some of the most dangerous advice ever given because it requires a level of emotional control that so very few people have.   The fact that your neighborhood Starbucks ($SBUX) is your favorite hangout doesn’t make a good or bad investment, but it can cause you to lose your objectivity. 

To be sure, an investor can learn a lot by visiting local stores. But you have to make a herculean mental effort to prevent anecdotal data  from feeding a confirmation bias that essentially tells you what you want to hear.  If you’re already a Starbucks bull, you might notice that the lines seem longer than usual but fail to notice that customers have traded down from venti size to tall, and vice versa for a Starbucks bear. 

Returning to the theme of hatred, we should also consider the peculiar case of sin stocks and particularly tobacco stocks.  I don’t know that there has ever been a more despised industry in history.  But investors who hate tobacco for personal reasons or avoid it due to moral qualms create trading opportunities for the rest of us. 

The historic tobacco stock underpricing has gone into reverse this year, and Big Tobacco giants like Altria ($MO) and Philip Morris ($PM) are among the best performing.  Whether this is simply a temporary phenomenon created by the current low interest rate environment remains to be seen, but the behavior of sin stocks is still something that every investor should study (see “The Price of Sin“). 

I’ll finish this with a confession.  After writing several hundred words in this article about the need for emotional control, I still hate FarmVille.  Just writing the word brings a sneer to my face and causes my heart rate to rise.

I have no business trading Zynga stock. 

 Disclosures: Sizemore Capital is long MO.

If you liked this article, consider getting Sizemore Insights via E-mail. 

No related posts.

By TraderVox.com

Tradervox.com (Dublin) – European Central Bank President Mario Draghi, saved the pair from deteriorating with bold statement about the Central bank’s intervention. His statement will be supported this week as the ECB makes rate decision. Here is a look at some of the events that are expected to shape EUR/USD sentiments.

On Monday at 0700hrs, the Spanish GDP data will be released. With Spain becoming the center of attention as the debt crisis in Europe continues to escalate, investors and analysts will be looking at this report for indications of any growth or future trend in various sectors. Spain is officially in recession already after its GDP contracted for two consecutive quarters by 0.3 percent each time. In this report, another decline of 0.3 percent is expected. The Retail PMI will be released at 0800hrs on Monday where a figure below 50 is expected. The previous reading was at 48.3, which was better than previous readings. The Italian bond auction will also be conducted on the same day, where yields below 6 percent for the 10-year benchmark bonds are expected.

On Tuesday, the German Retail Sales report will be released at 0600hrs, with an increase of 0.6 percent expected. There was a slight drop in Europe’s locomotive volume as it dropped by 0.3 percent. Investors will be looking for any signs of contagion to Germany despite the positive situation in the Eurozone’s largest economy. At 0645hrs, the French Consumer Spending report will be released. Consumer spending in France rose for the last two months and the market expects another rise of 0.2 percent. The German Unemployment Change figure will be released at 0755hrs GMT, where a rise to 8,000 is expected; five minutes later at 0800hrs the Italian Unemployment rate will be announced. The market expects the rate to increase to 10.2 percent from 10.1 percent. An hour later at 0900hrs, the euro-zone CPI Flash Estimate and Unemployment Rate will be released. The market expects the CPI to remain higher than the ECB estimate of 2 percent at 2.4 percent. In addition, the market expects the unemployment rate to increase from its previous reading of 11.1 percent.

On Wednesday, the Spanish and Italian Manufacturing PMI will be released at 0715hrs and 0745hrs respectively with figures expected to show declines. The Final Manufacturing PMI will be released at 0800hrs. The market expects no change from the previous reading of 44.1 points. The Spanish Unemployment Change, Euro Zone PPI and Rate Decision will be released on Thursday at 0700hrs, 0900hrs and 1145hrs respectively. Unemployment in Spain is expected to drop as a result of booming tourism sector. The euro zone PPI is expected to drop by 0.3 percent while the rate decision and the press conference thereafter will have major effects on the EUR/USD cross.

The Final Services PMI and Retail Sales for the euro zone will be announced on Friday at 0800hrs and 0900hrs respectively.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox

By Central Bank News
    Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list is updated during the day with the latest news about central banks so readers don’t miss any important developments.

By MoneyMorning.com.au

Watch silver.

It looks interesting.

I know only too well that holding the silver price hasn’t been much fun over the last 12 months. But some signs of life have recently appeared. It has found support yet again around the US$27 level, and has just bounced above the 50-day moving average for the first time in over 4 months.

Silver – The Sell Off Almost Over at Last?

Click to enlarge

I wouldn’t expect it to turn a corner and go to the moon in ten minutes from here, but I would say that it looks increasingly as though the worst may be over.

As these things tend to, silver may need to do a bit more ‘work’ around here, and retest the $27 level a few more times before anything happens. But it’s definitely worth keeping a watch on it in the next few months.

If Super Mario decides to go guns blazing this week, then silver could rally soon. Historically, silver is one of the best performers when the central bankers bust out their best dance moves. Silver comprises a small market, so it’s very sensitive to excess liquidity looking for a home.

For example, the trillion euros of Long Term Refinancing Options (LTRO) from the ECB during the first quarter of this year saw the silver price rally 37% from $27 to $37. And during QE and QE2 it increased at twice the rate that gold did, with silver almost doubling during the first run.

But be warned, silver can fall as fast as it rises. It’s not for the risk averse. Gold should form the core of a precious metals holding, with a bit of silver added too.

When asked how much of a portfolio should be allocated to silver, ultimate silver bull, Eric Sprott took a more aggressive view:

‘Put it this way – whatever percentage it makes up of your portfolio today, by 2020 it will increase in value so much it will make up more like 100%’.

That sounds a ‘bit’ on the bullish side to me, but I do think that we may be looking at a floor building in silver, which could mean the next leg up is coming soon. Silver has long alternated between extreme rallies followed by painful crashes.

But overall, this see-sawing has seen silver rising over the last 11 years. While gold has gained an average of 17% a year in $US terms, silver has outshone it, gaining an average of 22% each year.

The trick to profiting from this has been buying on the dips to get these gains – and just maybe we are staring at one of those dips right now.

Dr. Alex Cowie
Editor, Money Morning

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By MoneyMorning.com.au

If making understatements was an official sport in the Olympic Games, the International Monetary Fund (IMF) just won the gold medal.

According to their brains-trust, ‘downside risks dominate’ for the Spanish economy.

Have they been asleep? You have to wonder.

To quote Todd Hockney from the film ‘The Usual Suspects’:

‘Did you put that together yourself, Einstein? Do you have a team of monkeys working around the clock on this?’

A year-10 economics student could tell you the Spanish economy is in real trouble.

The unemployment rate has been above 20% for two years now. It was 24.6% at last count, and just keeps getting worse. Youth unemployment is double that. Spain is creating a whole new generation without a working culture, which has massive long-term effects on a society…

Spain’s economy is in reverse again. The last three quarters were negative – and getting worse. This is what Spain’s quarterly economic growth rate has looked like in the last five years. It’s a disaster.

Spanish Economy – Back into Reverse Again

Click to enlarge

It has effectively had no growth for five long years. And as the IMF says, ‘downside risks dominate’? Oh really IMF…you reckon?

This is Europe’s 4^th largest economy we’re talking about, and it’s dragging the whole region down. Europe was, until very recently, China’s biggest customer – so that means fewer exports, which in turn effects Australia’s economy. Maybe globalisation wasn’t such as good idea after all.

In comparison, during 2010/2011, Germany managed to notch up a growth rate of 2.1%. France got up to 0.9% at one point. Even Spain’s relaxed Mediterranean cousins across the water in Italy managed to grow at 0.8% for five minutes. Yet the best pace that Spain’s economy moved at in the last half-decade was 0.3%.

It’s hard to believe, but until a few weeks ago the IMF was calling for Spain’s economy to grow next year.

The IMF Completely Clueless

Then the IMF’s team of monkeys changed their minds on the 16^th July, telling us that just maybe…Spain’s economy would contract again next year at -0.6%.

But they weren’t done. They then revised this AGAIN last week, dropping it further to -1.6%. My Aunt Bessie could have probably figured that out for them, and saved them all that hassle.

Having them throw THREE different predictions at us in the space of two weeks tells you everything you need to know … The IMF doesn’t have a clue.

And no surprise, all is not well at good ship lollipop. Reuters reported last week that one of the IMF senior economists resigned in protest recently, accusing the IMF of ‘failing in the first order‘. If his job is now free, I should put my Aunt Bessie up for it, and see if she can sort things out.

Meanwhile, over at the European Central Bank (ECB), we now have its boss, Mario Draghi, challenging the markets to a duel.

Or should that be duet? You may have heard he threw the gauntlet down saying:

‘[he promised] to do whatever it takes to preserve the Euro … and believe me, it will be enough’.

Nice rhetoric, but what’s the plan Super Mario?

We may not have long to find out. The ECB meets on Thursday night.

It sounds like he’s getting ready to pull out the fabled ‘bazooka’. Part of his genius-master-plan will likely revolve around some form of balance sheet expansion, or covert money printing (QE). He’s like a union leader organising strikes. It’s the only trick in his book, and he just can’t help himself.

At the same time we have the Fed meeting for the next few days. When the US growth figures came in at a ropey annual rate of 1.5% last week, the market rallied in anticipation of more QE from the Fed.

Like Pavlov’s dogs, the Fed has got the market running round again trying to anticipate when it will get its next bowl of Scooby-snacks.

One place getting ready for this is the precious metals market. Gold has lifted its head up recently, and gold stocks are finally starting to move.

Dr. Alex Cowie
Editor, Money Morning

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By MoneyMorning.com.au

The US economy is slowing down.

On Friday, we learned that growth slipped to 1.5% in the second quarter. It was better than expected, but still down from the 1.9% annualised growth seen in the first quarter.

Perhaps more importantly, unless a deal on spending and taxes can be reached by the end of the year, massive spending cuts will take place. This is the so-called ‘fiscal cliff’ that everyone seems terrified of plunging over.

Yet US shares have been surprisingly resilient so far. Can this continue? Or should you be looking to invest elsewhere?

Why is the US Economy Slowing Now?

Earlier this year, things seemed to be looking up for the US. An average of 225,000 jobs were added in the first three months of this year. US unemployment fell from 8.5% in December to 8.1% in April.

The picture from several of the key leading indicators was also positive. Consumer confidence reached a peak of 79.3 in May – the highest since January 2008. Upbeat consumers normally spend more money, which suggested the strong run would continue.

However, things have taken a turn for the worse. Mean jobs growth fell to 75,000 in April, May and June, pushing unemployment back up to 8.2%. Consumer confidence has fallen back.

That saw second quarter growth slip to 1.5% – well below the rate needed to keep unemployment falling. Things look even grimmer if you take a closer look at the latest GDP statistics.

Durable goods orders (‘big ticket’ items) fell by 1%, while inventories rose. This suggests that firms will have the option of running down stocks rather than ordering new goods. That in turn will drag on GDP in the third quarter.

Worst of all, demand seems to be dropping, with personal consumption growth falling by half.

So why have consumers stopped buying? Fears over the euro crisis may be one reason why Americans feel more inclined to save money rather than spend it. The ‘flight to quality’, prompted by fears about European banks and countries, has also pushed up the US dollar, against the euro. It is now close to a two-year high. This has made exports dearer.

Weak Asian demand is also bad news for American firms trying to sell their goods and services abroad.

However, exports aren’t the main reason for the slowdown. While export growth has slowed, exports to the eurozone are still up on last year. In any case, the eurozone crisis has been going on for the past 18 months, so it has limited value in explaining the sudden slowdown.

The Chances of the US Economy
Going Over the Fiscal Cliff Are High

The main factor worrying consumers may well be the looming ‘fiscal cliff‘.

Last summer, as you might remember, there was a major fight over the decision to increase the amount that the US government can legally borrow. While these fights are usually symbolic, some politicians in Congress refused to allow the debt limit to be increased, arguing that government spending had got out of control.

At one point the US government came very close to either defaulting on its short-term debt, or temporarily shutting down the government.

In the end, a deal was done. But as part of it, both parties agreed a process whereby public spending would be reduced in 2013. Automatic cuts were set in place, to ensure some cutting was done even if politicians couldn’t agree on where to trim. Tax cuts are set to expire at the same time.

Combined, these measures would reduce the US deficit (its annual overspend), by $500bn (it currently overspends by more than a trillion dollars a year). While this would improve the US finances, the cuts would also hit economic growth. Indeed, the economy could be pushed into recession.

A cynic might argue that much of this is pre-election posturing. Politicians being politicians, you’d expect them to eventually reach a deal that allows both parties to save face, while moderating both the hikes and the cuts. One solution, for example, would be to allow the top rate of tax to revert to its original higher level, while keeping all the other brackets the same.

However, the coming US election is likely to leave Congress split between the two parties. As a result, each side will have a veto over any solution. So far from being more open to compromise, the losing side is likely to dig in its heels, to show its supporters that it still means business.

Yes, some of the cuts, especially to the defence budget, may be moderated. However, the bottom line is that a sudden fiscal contraction is much likelier than you might think. And it seems that much of the weak growth in investment and consumer spending could well be due to consumers and businesses being unsure of how much money they should set aside for taxes.

US Shares Look Too Expensive

Dylan Grice of Societe Generale also notes that things are looking bad for US firms. With US profit margins at or near record levels, you can ‘expect margins (and hence profits) to plunge lower’. If this proves correct, then share prices will be hit hard.

Given that the S&P 500 is one of the more expensive global stock markets these days, we’d avoid the index for now. But we wouldn’t advise you to go short. As we’ve pointed out before, Ben Bernanke pays close attention to the stock market. If prices plunge you can expect him to launch another round of money printing. The GDP data probably wasn’t bad enough to justify a third batch of quantitative easing (QE) on their own, but Bernanke will be looking for an excuse.

Instead, we’d suggest you look at markets that are cheap. They’d still benefit from any fresh QE in the US, but also look good value on their own.

Matthew Partridge
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

Get Ready to Pin Back Your Ears With Gold Stocks
27-07-2012 – Dr. Alex Cowie

The Upcoming Interest Rates Shock You Should Prepare For
26-07-2012 – Kris Sayce

Don’t Believe ‘the Bull’ on Australian House Prices
25-07-2012 – Kris Sayce

Why the Melbourne Property Market Could Be Set For Two Years of Pain
24-07-2012 – Dr. Alex Cowie

The End of Growth Through Currency Wars
23-07-2012 – Dan Denning

The Biggest Threat to the US Economy

By Central Bank News

By TraderVox.com

Tradervox.com (Dublin) – According to Jean-Claude Junker, the Luxembourg’s Prime Minister, the EFSC and the European Central Bank are preparing to make a coordinated move to reduce the borrowing costs in the region. Junker indicated this in an interview with one of the leading media houses and the comments are in line with the ones made by Mario Draghi, the ECB President; Angela Merkel, the German Chancellor; and Francoise Hollande the French President. The comments have been precipitated by the rising borrowing cost in Italy and Spain.

The European Central Bank has bought bond before in 2010 from Greece and in Summer of 2011 from Italy and Spain. The move was chosen over printing more money in a quantitative easing program. The quantitative easing program has been used by the Bank of England and Federal Reserve, but the ECB stopped the SMP program after it introduced the LTRO program.

Some of the steps investors are expecting the ECB to take include a reintroduction of bond buying program where they would make massive scale bond-purchases not seen before.  This move would have to be made without sterilizing the bond buys as there are fears of inability to drain out the funds, the ECB can also claim that the move is a measure to tackle the danger of deflation, which would then make this to fall under the Bank’s mandate.

Analysts have indicated that an unsterilized QE program would weaken the euro as the Central Bank would be pouring money into the markets. A weak euro would be good for Spain; however, analysts have warned that the QE program has been strong in the US but this is not the case in other places. There is a general feeling that printing more euro would increase the common currencies value hence beating the potential devaluation effect.

The European Central Bank would make this as the biggest move that has a potential to quell some of the problems facing the single-currency bloc, but there are some opposition from Germany and other members of the bloc. This is something the bank and the region leaders will have to deal with if the ECB is to implement something that will support Mario Draghi’s comments.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox