Tuesday, September 8, 2009

* Dividend Stocks Are Getting Expensive

Over the last several weeks, the number of dividend stocks my model identified as a buy has greatly declined. On July 3rd it flagged 14 stocks as potential buys verses only 7 stocks on August 29th. The August 29th list had the advantage of using a quarter point lower minimum dividend. Needless to say the recent market rally has made many dividend stocks expensive.

Several market observers believe the market has moved too high too fast. In a recent Wall Street Journal article Jason Zweig expressed his concern. Here are some points he made:
  • The Dow Jones Industrial Average is up 46% since March 9
  • In March, stocks traded as low as 11.7 times their average earnings over the previous 10 years
  • Today stocks are selling at 18.4 times which is above the long-term average of 16.3 times earnings
  • In March, investors feared getting crushed in a further decline
  • Now all they seem afraid of is missing an even greater rally
  • In August, corporate insiders sold nearly 31 times as much stock as they bought
  • Investors chase past performance, buying whatever has just made the most money for other people and themselves
  • 401(k) participants tend to add significantly to whichever funds they already own that have gone up the most
  • Benjamin Graham in his classic book "The Intelligent Investor," wrote "the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances."
  • If you can't exercise that kind of emotional control, then by Graham's definition you aren't an investor at all
I have long believed that most people will lose money in the stock market over their lifetime. The above provides indirect evidence of my hypothesis. Emotion is a powerful thing the fear of losing it all or missing out when everyone else is making money drives some people to make bad decisions. To be a successful investor, you need a winning process and a firm conviction to stand by it during the good and bad times. Otherwise, you would be better off not investing in stocks.

Here are five dividend stocks that are trading below their calculated fair value:

Automatic Data Processing Inc (ADP) - Analysis
Automatic Data Processing Inc. is one of the world's largest independent computing services companies, provides a broad range of data processing services.
  • Fair Value: $43.57
  • Recent Price: $37.50
  • Yield: 3.4%
Cardinal Health Inc (CAH) - Analysis
Cardinal Health Inc. is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.
  • Fair Value: $46.16
  • Recent Price: $25.00
  • Yield: 2.0%
Dover Corp. (DOV) - Analysis
Dover Corp. manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.
  • Fair Value: $35.65
  • Recent Price: $33.50
  • Yield: 3.0%
Emerson Electric Co. (EMR) - Analysis
Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.
  • Fair Value: $38.39
  • Recent Price: $35.75
  • Yield: 3.6%
Sysco Corp. (SYY) - Analysis
SYSCO Corporation, through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily for food service industry in the United States and Canada.
  • Fair Value: $27.36
  • Recent Price: $25.00
  • Yield: 3.8%
My investing process involves selecting stocks from quality companies that have a history of consistently increasing their dividends. I believe in this methodology enough to stick with it through the good and bad times.

Full Disclosure: Long ADP, EMR, SYY. See a list of all my income holdings here.

Tags: [ADP] [CAH] [DOV] [EMR] [SYY]