They say there is safety in numbers. That may be true heading
into battle, but it's not necessarily true in theinvestment
Whether it's tulips, dot-comstocks or houses, popularity can
push the short-term price of assets past their true long-term
But while bubbles can build over time, price corrections can
Lots of investors get trampled in the stampede when the herd
decides a popularasset is no longer worth themoney .
The latest example of a "crowded" investment comes from one
sector you might least expect. We're not in "bubble" territory
yet, but buying these stocks now could be risky.
First, let me explain how we got here...
In December 2008, the U.S. Federal Reserve lowered theFederal
funds rate -- the overnight lending rate between banks -- to
almost zero percent. The hope was that lower interest rates on
everything from mortgages to business loans would help stimulate
economic growth. Butthe Fed 's policy also resulted in
historically-low savings rates.
This led to retirees and conservative income investors to
slowly move their money out of savings accounts and
U.S.Treasuries and into defensivedividend stocks in search for
The period between 2009 and 2012 was particularly good for
steady dividend-payingequities -- the "widow and orphan" stocks
considered safe enough for the most risk-averse
investors.Inflation was tame and the economic recovery was strong
enough to deliver solid total returns from dividend stocks.
Now, the valuations of
defensive dividend-paying stocks have become downright
The irony, of course, is that the overcrowding in these "safe"
stocks is making them less safe.
As themarket plunged during the financial crisis a few years
ago, many retail investors took to the sidelines. It's hard to
blame them. From Oct. 9, 2007, to March 9, 2009, the S&P
Even as the market rebounded, it was not a smooth ride. Every
week a new worry roiled the global markets. And many retail
investors continued to keep their money parked incash or the safe
haven of U.S. Treasurybonds , failing to find a worry-free entry
point to get back into the market.
But as 2013 started to unfold, a new fear gripped investors on
the fear of missing out.
As the media hyped the potential for the markets to hit
all-time highs, sidelined investors eyed their meagersavings
account returns with disdain.
When cautious money finally started moving off the sidelines,
it moved into so-called "safe" dividend-paying
In the first quarter of 2013, the S&P 500 gained an
impressive 10%. The riskier cohort of stocks in theNasdaq
Composite Index managed togain 8.2%. But neither of these market
indices could hold a candle togains in defensive stocks,
primarilyconsumer staples and utility stocks (as you can see in
the chart below).
Here are a few telling examples...
At the end of 2012, the price-to-earnings (P/E ) ratio for the
paper products company Kimberly-Clark (
) was 16.1. By the end of the first quarter of 2013, it had been
pushed up to 18.7. In the same three months, the P/E of Johnson
& Johnson (
) rose from 13.6 to 15.9. The P/E for pharmaceutical company
Bristol-Myers Squibb (
) increased to 21.9 from 16.
Could these above-average valuations hold? It's possible. If
global economic conditions worsen, the demand for defensive
stocks may hold steady. On the other hand, if the market begins
to correct, then the last cautious investors in may be the first
fearful investors out.
Even a small downdraft in "safe" stocks could trigger an
exodus out of defensive equities back to the sidelines.
Now, I'm a fan of dividend-paying stocks, especially in
challenging market environments. Every day, I scour the markets
for opportunities in dividend-paying equities to add to the
portfolio of my newsletter,
The Daily Paycheck
. But what I don't want is to overpay for dividends -- especially
when other dividend-paying sectors are cheap by comparison.
While nearly every utility and shampoo company has become a
high-priced investor darling, many big tech companies, for
example, have been flat-out ignored.
Companies like Microsoft (Nasdaq: MSFT), Cisco Systems
(Nasdaq: CSCO) and even Apple (Nasdaq: AAPL) are growing too
slowly to capture the hearts of aggressive investors. And many of
those conservative income investors I just talked about -- and
you may be one of them -- still perceive the tech sector to be
I think that's a mistake.
The relative valuations of these companies, along with their
solidearnings growth projections and dividend-growth projections
suggest that these stocks may actually be a saferyield play than
many investors recognize.
That's why in March, I did something I had never done in
The Daily Paycheck
. I bought a tech stock:
Intel (Nasdaq: INTC)
In the heyday of personal computers, Intel was a tech
powerhouse. But over the past few years, consumers have been
gravitating toward mobile devices such as smartphones and
tablets. And when it came to the semiconductors that powered
mobile devices, Intel was a little late to the game. But Intel's
chips have started showing up in emerging-market mobile devices,
and it's a market the company expects to develop
The company has its share of challenges. I suspect Intel may
even have to rethink its aggressivecapital spending plan going
forward. But it is sitting on a boatload of cash, has a solid
track record of dividend growth, and -- most important --
it has a plan.
Even if Intel's rebound takes a fewquarters , patient
investorswill be paid well to wait. At current prices, Intel has
a yield of 4.3%. And investors may not have to wait long for a
dividend hike -- Intel has raised its dividend for four straight
years, boosting it 37.8% since May 2009.
Action to Take -->
It may be a long road, but expectations for Intel'sturnaround are
low, which should mitigate some of thedownside risk . And any
positive surprise should make thisstock rejoice to theupside
I started with a small position in Intel and plan to pick up
moreshares over the next few months. With the market at relative
highs, I would encourage investors to stage -- or dollar cost
average -- into any new position.
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