I am definitely under the impression that we are right in the middle of the investing opportunity of a decade if not more! I am looking at different dividend stocks and the same observation comes back again and again; is it just me or it is too good to be true?
Low P/E Ratio
Since the beginning of 2009, the stock market regained signs of life and we can say that we now off of the pacemaker. However, due to the market volatility, the finance problems in European countries and the huge American deficit, investors are still very shy with their investments. They prefer to keep their liquidity aside in ridiculous low rate (they still call them high yield!) savings account.
Therefore, as I mentioned in my first stock pick (I selected JNJ), there are several companies with low P/E Ratios. For example, JNJ trades around 12-13 P/E ratio. For most decent paying dividend stocks, they are trading at their lowest P/E ratios in the past 10 years! Even though you are looking to earn a steady distribution, making capital gains on top of that is just a bonus. I think that, sooner or later, investors will realize that they are better off investing their money in an undervalued stock paying a 3-4% dividend yield than investing in their high yield savings account at… 2%!
High Dividend Yield
A direct consequence of having undervalued stocks is to have higher dividend yield than usual. A few years ago, well established companies were paying small dividends, barely covering the rate of inflation. So where we usually find a 2-3% dividend yield, we can now find a 3-4% distribution rate. If you are looking for a steady income, dividend investing may be your solution since bonds will definitely not do it right now.
High Liquidity
Another factor that makes me believe that we are about to live a true market recovery is the level of liquidity held by both investors and corporations. While investors are too scared to buy shares, corporations wait carefully before investing more money in R&D, hiring or acquiring a competitor. It seems that only a few folks are on the playground while most people are still waiting on the sidelines.
At one point in time, this money will have to serve a better purpose than rotting in a cash account. Investors may start to tire of the wait and re-enter the stock market machine again. If investors don’t move, I guess some companies will certainly dare to benefit from this opportunity. We have started to see it happening with the recent offer of BHP on Potash, HP bought 3com, Palm , 3PAR and ArcSight, the hostile bid on Casey’s by Couche-Tard and so on…
While acquisitions are being slowed by cowardly measures installed by banks, some corporations have enough cash to put on the table to make them serious players.
The unique chance of building a high yield dividend portfolio with blue chips!
There was a time where an investor had to take some risks if he wanted to build a high yield dividend portfolio. These days, he can build a solid portfolio delivering around 4% with only great companies. The risk is minimal and the expected return on these investments is phenomenal. I just with I had more cash to invest!
How about a stock pick that trades on a Canadian exchange?
@ Hawk
good question. I’ll actually prepare an article on that.
thx for the idea!
I agree that market conditions are really conducive to buying right now. It’s not as easy to find value as it was early last year, but there are still plenty of attractively priced stocks out there. Companies like JNJ are at fairly incredible prices.