A Personal Note…
The markets happily made it through the first quarter of 2010 with the S&P 500 +4.9% and the Dow +4.1%. The Russell 2000 was up big, +8.5%. I can’t remember the last time I saw such huge spreads between large cap and small cap companies in terms of valuations. The Russell 2000 is trading at 23.8x 2010 earnings, the S&P 550 is 15x and the S&P 100 (the largest companies in the S&P) at 14.7x. Even though the market has moved this year, we still find the large cap dividend paying stocks attractively valued.
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Catherine Maniscalco AveryCAIM specializes in creating and managing
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A Tale of Two GuysThis is the story of two guys; Joe and Moe, both business owners.
MOEMoe has been in business for over 30 years. He appears to have a great reputation and has taken care of his clients. But he is overloaded with debt and quickly running out of money to pay his employees’ retirement benefits. He also keeps spending to make it look like he’s creating jobs and security (i.e. healthcare.) For a $1,000 investment, Moe will pay you 2.74% for 5 years. At the end of the 5 years, he will give you back the $1,000 plus $137 in interest for a total of $1,137.
JOEJoe has also run a business for over 30 years. Joe’s been very judicious in how he runs his operation. When things get tough, he tightens his belt. He also doesn’t overspend and cuts costs when recession hits. Joe continues to pay his employees their bonuses (aka dividends) and has very little debt. He will give you a minimum return of 3% a year for 5 years. If business is better than expected, he will raise the rate as time goes on. He also thinks that his business is undervalued and if he grows his company’s earnings, he might be able to increase his payout to you by 20%. If all goes well, at the end of 5 years, this is what Joe thinks you will get: $1,000 plus $200 appreciation and $150 annual dividends for a total of $1,350. This is 18% better than Moe can pay!
Both Moe and Joe are asking for money to grow their businesses. Who would you give your money to? The most obvious answer would be Joe. Right? Joe has run a solid business. He’s prudently kept costs in line and done the right thing by his employees and investors.WHO ARE THEY REALLY?Now let’s tell you who Moe and Joe really represent.Joe represents large cap, multinational companies that have been judicious in running their companies and returned money to shareholders in the form of dividends.
Moe represents the Government. I find it so surprising that ever since we’ve gone into a recession, individual investors have been pouring their money into municipal and government bonds. With the level of deficit we’re currently at, it’s frankly crazy to be buying bonds. Maybe a short-term bond makes some sense. But even the latest rates show the 2-year note paying just 1.14%. Compare that with a high quality dividend paying stock at 3%.A CALL TO ACTIONThe economy is looking better and better every day. Which means it’s the right time to revisit your portfolio and restructure it to outperform inflation and provide a stream of income. When was the last time you looked at your portfolio?