Money Matters - Simplified

The Worst Stock Myth of the Decade

Two enormous recessions. Unparalleled government bailouts. An entire lost decade of growth.

It's been more than 10 years since the tech boom, and most of us have about the same net worth as we had in the first place -- or possibly less. The result of this flat and oftentimes irrational stock market has been a media rush to call "an end" for the average buy-and-hold investor.

The rumor mill is circulating and in full effect: Get out of the stock market before it's too late!

Is this the beginning of the end for the stock market, or will predictions of stocks' demise turn out to be the worst myth of the 2010s?

Where exactly are you going?
From 1980 to 2000, scholars like Jeremy Siegel and others were touting the wisdom of long-term, buy-and-hold investing; individuals and academics alike were virtually all on the same page. In fact, one survey by a Securities Industry Association in 1999 showed that most investors expected to earn a rate of return equal to about 30% -- confidence was at an all-time high!

Nonetheless, according to a recent article in The Atlantic, the modern diversified portfolio, the ease of which we use technology, and the growing popularity of mutual funds have possibly combined to erode our equity premiums. In fact, while most savvy investors used to expect an annual return of 8%-10%, there's plenty of chatter about that number being much closer to 4%-5% for years to come. Smithers & Co., an asset allocation firm, has forecasted that the next 10 years in the stock market will deliver a paltry 1.8%. So where do you go from here?

  1. Savings: While it would be nice to allocate a large portion of our nest-egg in savings, CDs, or Treasuries, it just isn't possible anymore. Savings accounts offer near-zero interest rates, and even the 10-year Treasury yields barely more than 2.5%.
  2. Bonds: Corporate bonds and bond funds have had a great run. However, even the global bond guru Bill Gross expects lower returns. According to Gross, because rates have nowhere to go but up, "bonds have seen their best days." And this comes from a man who manages a $214 billion bond fund. Ouch.
  3. Government: There may have been a time when you could save what was possible and expect your employer and the government to fill out the rest. With pensions long gone and 70% of workers not confident in Social Security, those days are simply over. For the first time ever, this year, payouts to retirees and the disabled will exceed what the government brings in from payroll taxes.

The bottom line is that regardless of what pundits will say about the stock market, it's the only real option you have left. You need individual stocks to protect your portfolio -- period.

Get back to basics already
Years ago, investing in dividend stocks was all the rage. But then the market took off, technology and globalization changed the way we invested, and dividends became boring or old-school. Investors expecting those 30% returns certainly weren't going to find them in dividends -- hence the flock to the fast-growers and the small-caps with unlimited potential.

Yet things have changed, and if you're not investing in dividend stocks right now, you're missing out on an amazing opportunity. Throughout history, academics have proven that dividend-paying stocks outperform their non-paying brethren. In addition, from 1871 to 2003, only 3% of the market's return actually came from capital appreciation -- that means that 97% came from reinvesting in dividends!

So in order to avoid the greatest myth of our decade -- that stocks can't provide above-average returns -- you've got to start investing in dividends. In particular, you need to find stocks that pay great yields, that have sustainable payout ratios, and that have illustrated a knack for increasing their dividends over time. To help you in your quest, I've identified seven stocks that not only fit the criteria above, but that are trading for dirt-cheap valuations (to help ensure value).

Company

Dividend Yield

Payout Ratio

5-Year Dividend Growth

P/E Ratio

Total SA (NYSE: TOT)

4.8%

52%

8.7%

9.5

Hudson City Bancorp (Nasdaq: HCBK)

5.1%

52%

19.8%

10.3

Exelon (NYSE: EXC)

5.1%

55%

6.9%

10.8

DuPont (NYSE: DD)

3.9%

47%

2.9%

12.1

Petrobras (NYSE: PBR)

3.6%

42%

13.6%

8.2

Abbott Laboratories (NYSE: ABT)

3.5%

47%

9.4%

14.7

Intel (Nasdaq: INTC)

3.2%

35%

19.9%

11.7

 Source: Capital IQ, a division of Standard & Poor's'

All seven of these stocks fit the perfect dividend mold -- they pay good, sustainable yields, they have plenty of room to grow, and they are trading for more-than-reasonable prices. In addition, I tried to choose stocks that would help create a diversified portfolio, so every sector is covered, from technology to finance to health care.

Don't believe the hype
There will always be people -- whether it be friends, colleagues, or professionals -- that employ fearmongering as a way to express their philosophy. However, while I agree that our investing world has certainly changed, I disagree with the notion that returns will be dismal and that you must avoid stocks to ensure your financial safety. Investing in dividend stocks is still a prudent, reliable, and wealth-generating way to keep you on the fast track toward retirement. You may not get rich overnight, but you can certainly sleep well knowing that you didn't get bullied in the wrong direction.

© 2010 UCLICK L.L.C.