Chasing Yield
Research for Online Investors

by John Dalt

9/21/11

Safe haven stocks have done very well in the last few weeks as investors moved from riskier small caps to larger stable companies to weather the storm.  Something else has happened.  Fixed Term investors have finally thrown up their hands and decided to buy large-cap dividend paying stocks.  A five year treasury bond pays 0.87% interest; why not buy a nice safe utility stock that pays 3%?

I’ll tell you why.  You are buying at the top of the market, and setting up a bubble that will pop.  If you are uncomfortable owning stocks and the volatility that involves, how are you going to handle your stock dropping in price 10%?

This isn’t your mama’s bond program.  You are subject to the laws of supply and demand.  You are subject to the whim of the market.

Here is an example; you can find many more…just be cautious if you have them in your portfolio for the “great dividend” payouts.  Consolidated Edison (ED) pays a 4.2% dividend.  Boy that is a lot better than treasuries.

Here is the problem.

Ed hit its 52-week high (under normal market conditions) back on 5/12.  It followed the wider market during the summer until August when it fell hard on the market testing lows.  Then what happened?  Ed went on a run to gain 14% in the last five weeks blowing past its high when the general market was trading much higher.

Safety never seemed so profitable.  Equity investors took off risk and bid this sleepy utility higher.  Fixed term investors threw in the towel on treasuries and bought utility stocks.  What could be safer?

Ignore the name on this chart, which one would you rather own?  Talking heads are telling you every day that precious metals are in a bubble.  If silver is in a bubble then so is ED.  ED is 10.8% above its 200-day moving average; SLV is 11.8% above its 200 day moving average.

True, SLV doesn’t pay you a 4.2% dividend, but that is not why you own precious metals.  We don’t buy precious metals to make income or for retirement.  The buyers of ED believe they have bought a safe investment that will pay them a nice return in dividends.  What are they going to think if it drops to its 200-day moving average?  How good will a 4.2% dividend look when the stock is 11% lower?

Beware of Chasing Yield

That is what makes ED and other “safe” blue-chip stocks so dangerous right now.  If the market goes into a correction and retests the lows from August, or worse, these stocks are going to get hammered as “conservative” investors lose their nest egg.  They will overshoot the averages and have the biggest losses.

My grandmother passed away a few years ago.  She always told me how dangerous utility stocks were.  They lost a lot of money on utility stocks in the Great Depression.  Now you know why.

Quote:
We still have our challenges in the United States" and "our politics are terrible ... maybe worse than they are in many parts of Europe."—Treasury Secretary Turbo Tim Geithner to Eurozone Finance Ministers last weekend.

Especially when a pliable Nancy Pelosi is not in the Speaker’s chair!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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