Daily Investment Interpretations

April 19, 2009

2009-4-19:   It has occurred to me that this is the time of year when (1) income tax refunds are arriving from the Internal Revenue Service,  (2) IRA contributions are showing up for stock market investment,  (3) the leading edge of the fiscal stimulus package is reaching the consumer in the form of reduced withholding of income tax. The U. S. stock market usually surges at this time of the year, only to fall away after the merry month of May. ("Sell in May and go away.") Last year, the stock market peaked around the middle of May, falling until the middle of July, rising until the end of August, and then falling off a cliff from September through November. James Cooper, who writes the Business Outlook" column for BusinessWeek, wrote his first cheery column in the April 13th issue, but since then, it's been "back to reality". This week's column points our what will be required in order for an economic turnaround to occur in this year's second half (a lot). (We should have some kind of "read" on that when the 1st quarter's preliminary GDP results are released.)
    In the meantime, for diversification purposes, I've been looking at investment vehicles in addition to China. One of these may be high-dividend-yielding U. S. stocks or mutual funds. The current issue of Kiplinger's magazine has a list of 10 high-dividend stocks that the authors believe will tend to maintain their high dividend yields (along with a list of 10 others that they fell are on an endangered list.) Whose Dividend Can You Trust?  The 10 companies are as follows:

Company Ticker Yield Rebound
AT&T T 6.2% 1.72
Chevron CVS 3.9% 1.6
Eli Lilly LLY 5.8% 1.8
IBM IBM 2.0% 1.28
KMB 4.8% 1.44
Merck MRK 5.8% 2.4
PBI 5.8% 2
Qwest Q 9.1% 2.9
O 7.6% 1.36
SO 5.6% 1.35

    The last column, "Rebound", is the ratio of the peak prices of these stocks in 2007 divided by their current prices. These are the factors by which they should appreciate if these stocks return to their 2007 highs.
    These are remarkably high dividend yields... reminiscent of the super-bear market bottom in the summer of 1982. The prices of such stocks tend to rise until the dividend yields fall. These dividends tend to keep up with inflation, so the dividend yield is "real"... after correcting for inflation.. The idea of an after-inflation return on AT&T of 6.2% a year is pretty dramatic.
    Buying these high-dividend-yielding stocks is a potent strategy. You can get a good return on your investment even if the stock market stays where it is, and if the stock market goes up, these stocks should recover smartly.
    Kiplinger's Magazine also lists three dividend funds that look good to them. One of these, the iShares Dow Jones Select Dividend Index (DVY), has fallen down because it was heavily invested in the financial sector. It currently yields about 3.6%. The other two are the T. Rowe Price Dividend Growth fund (PRDGX), and the Fidelity Dividend Growth Fund (FDGFX). The T. Rowe Price fund is down at less than half its peak value, and has the potential to double or more. Its dividends should bring it back over a period of a few years even if the U. S. stock market remains mired in it present morass. Like the T. Rowe Price fund, this Fidelity fund is also off by more than 50%.