Getting Paid While We Wait
June 08, 2010 13:04
What can you invest in if you think the market is fragile and you don’t like the direction the world is going?
Before this recent correction, the market had risen nearly 70% from the low point in 2009 without much evidence of economic improvement. It’s hard to believe that the market reflects reality when values can change so much with so little real improvement. The fact is that the market has not been reacting to news, its been over-reacting on the upside and the downside.
Many investors are conditioned to ignore short-term volatility in order to capture the value created by the long-term the growth of the economy. But if the economy is not growing, there is no reason for the market to grow — even over the long run.
Until the world’s economies start growing again, I think stock prices will be volatile and the underlying trend will be flat. This is why I think it makes sense to look for stocks that will pay a good dividend while we are waiting for economic growth to resume.
One of the stocks that fit this profile is Penn West Energy (PWE). Penn West Energy is the largest holding of Chris Rees. Chris’ Marketocracy track record is impressive. Over the past almost 10 years, he has averaged 25.5% a year while the market has been flat. That is why I often use his model portfolio for clients in separately managed accounts.
PWE’s dividend yield of 8%. But unlike many stocks that pay high dividends, there is also the potential for a significant capital gain.
It wasn’t that long ago that oil traded at $147/bbl and the market placed a much higher value on PWE’s proven reserves of oil and natural gas. The reason the stock is trading where it is right now is that the price of oil has dropped to about $70 due to reduced energy demand resulting from the worldwide recession. When economic growth resumes, I think the value of PWE’s proven reserves will increase. Economic growth is the catalyst that will give us a capital gain in PWE at some point in the future.
If the capital gain were the only part of the story, I would wait until there are clear signs of economic growth to buy the stock. But, if I can get paid 8% a year to own the stock, I don’t mind buying the stock well before I can see the catalyst for the capital gain. I may be early, but the 8% dividend yield makes me comfortable holding on through this stormy period of the market while we are waiting for clearer skies.
Steve Harvey, an m100 member with a 7 year track record averaging 12.0% a year tells me that Royal Dutch Shell ADR (RDS.A) with a yield of 6.2% also fits this profile.
After a decade in which the market has been flat, an 8% dividend yield looks pretty attractive. For many people, this is almost enough to fulfill their financial plan.
I think it’s possible to put together a portfolio of stocks that all share the same profile: high enough dividend to make us comfortable holding them until a clearly defined catalyst gives us a capital gain at some point in the future.
Before this recent correction, the market had risen nearly 70% from the low point in 2009 without much evidence of economic improvement. It’s hard to believe that the market reflects reality when values can change so much with so little real improvement. The fact is that the market has not been reacting to news, its been over-reacting on the upside and the downside.
Many investors are conditioned to ignore short-term volatility in order to capture the value created by the long-term the growth of the economy. But if the economy is not growing, there is no reason for the market to grow — even over the long run.
Until the world’s economies start growing again, I think stock prices will be volatile and the underlying trend will be flat. This is why I think it makes sense to look for stocks that will pay a good dividend while we are waiting for economic growth to resume.
One of the stocks that fit this profile is Penn West Energy (PWE). Penn West Energy is the largest holding of Chris Rees. Chris’ Marketocracy track record is impressive. Over the past almost 10 years, he has averaged 25.5% a year while the market has been flat. That is why I often use his model portfolio for clients in separately managed accounts.
PWE’s dividend yield of 8%. But unlike many stocks that pay high dividends, there is also the potential for a significant capital gain.
It wasn’t that long ago that oil traded at $147/bbl and the market placed a much higher value on PWE’s proven reserves of oil and natural gas. The reason the stock is trading where it is right now is that the price of oil has dropped to about $70 due to reduced energy demand resulting from the worldwide recession. When economic growth resumes, I think the value of PWE’s proven reserves will increase. Economic growth is the catalyst that will give us a capital gain in PWE at some point in the future.
If the capital gain were the only part of the story, I would wait until there are clear signs of economic growth to buy the stock. But, if I can get paid 8% a year to own the stock, I don’t mind buying the stock well before I can see the catalyst for the capital gain. I may be early, but the 8% dividend yield makes me comfortable holding on through this stormy period of the market while we are waiting for clearer skies.
Steve Harvey, an m100 member with a 7 year track record averaging 12.0% a year tells me that Royal Dutch Shell ADR (RDS.A) with a yield of 6.2% also fits this profile.
After a decade in which the market has been flat, an 8% dividend yield looks pretty attractive. For many people, this is almost enough to fulfill their financial plan.
I think it’s possible to put together a portfolio of stocks that all share the same profile: high enough dividend to make us comfortable holding them until a clearly defined catalyst gives us a capital gain at some point in the future.