The current economy stands at what I call ‘slack tide’…that point at which there is little or no movement. The next major decision out of Washington (or possibly other parts of the globe) will determine whether our economy begins to rise or whether it recedes into a secondary recession. Regardless, if you have money to invest, it behooves you to ask the question, “Where is the best place to invest right now?” Assuming you won’t need to tap this money for a minimum of five years, I believe that one of the best choices for conservative investors is dividend-paying blue chip stocks. Here’s why:
- Relative high yield. The 10-year treasury recently dipped below 2% for the first time in history; most money market accounts are paying well below 1%; and bank CDs, even with a 5-year term, are struggling to pay 2%. Federal Reserve Chairman, Ben Bernanke, recently stated his intention to keep rates low for a minimum of two years. Compare this to a basket of blue chip stocks. We are currently using a 30-basket of blue chip stocks whose composite yield is over 4%. Companies such as Intel, AT&T, Chevron, Nextera and DuPont have strong balance sheets and a long history of never missing a dividend.
- Reagan era PE’s. Review the past 50 years and you’ll find that the average stock price was 16.4 times corporate earnings (known as the P/E ratio). Currently the P/E for the S&P 500 is 12.9, a ratio last seen during the Reagan era and lower than the ten economic contractions since 1949, according to Bloomberg. What this suggests is that, in historical terms, stocks represent a good value today. Obviously, they may become an even better value before we see them reach new highs but if you are receiving good cash flow in the form of dividends, you can afford to wait.
- Strong balance sheets. Virtually every corporation in America has used the Great Recession of 2008 as an opportunity to cut the fat from their balance sheets and many have stored up huge stockpiles of cash that they are eager to deploy to expand their operations once they are confident that they understand the rules of engagement. What’s holding them back is the uncertainty of how they will be regulated and taxed. Once this is settled (the 2012 elections?), you can expect to see a mass of activity.
- Baby Boomer dynamics. Eighty million Americans are headed for the retirement exit door over the next couple of decades. What are they going to be looking for? I would suggest that their two primary objectives will be a rising income for bill paying and inflation and conservative growth. Blue chip stocks are tailor-made for these Baby Boomers.
I realize that it’s a bit scary to invest in the stock market in the middle of these crazy economic times, but when you rationally consider all the alternatives, by owning dividend-paying blue chip stocks, you’re being well paid while you wait for the economy to recover and the stock market to reach new highs.