In the financial world analysts use valuations to create growth projections based on the expectations that the future growth rate of an asset will mimic the historical growth rate for that asset, explains Kelley Wright, dividend expert and editor of Investment Quality Trends.
This should result in the asset achieving a specific price target over a specific period.
In the retail world investors, on the other hand, often have expectations that an asset will continue to grow regardless of valuations simply because it has been growing, which justifies further buying, which results in higher prices. A self-fulfilling prophecy if you will.
The difference between the two approaches, obviously, is one considers valuations and the other does not. Of course, this calls into question what valuations are and what are valuations.
Value differs from one investor to another. Accordingly, the return on investment from a specific asset will vary from one investor to another depending on the price the respective investor believes represents good value.
We turn to the Dividend Yield Theory, which states, in part, that value is determined by yield. This is to say that in order to identify value one needs to know the repetitive areas of dividend yield that an asset fluctuates between. In this approach, therefore, our expectations are based on repetitive patterns of dividend yield.
If millions of investors that do not know each other tend to purchase a stock at a repetitive high yield area, which halts the downtrend of the stock, then hold that stock until the price rises to where the current yield has declined to a repetitive low-yield area then sells the stock, which halts the uptrend, it establishes a repetitive pattern of value that provides reasonable expectations for when to buy, sell, or hold.
The advantage of this approach is that it eliminates the speculation about future growth rates based on past growth rates. Dividends, on the other hand, are much more stable, as they are a company policy and are not declared and paid unless the company knows their cash flows will be sufficient to support the dividend.
A consistent dividend trend, and repetitive dividend yield patterns, therefore, are much more informative and predictive than are earnings projections. This is what sets high-quality, dividend paying stocks apart from stocks that pay little or no dividend or have no repetitive dividend yield pattern.
As interest rates have started to increase, however, participants have been rotating from growth toward value as value stocks tend to have an income component from dividends. Indeed, a quick look at our Blue Chip Trend Verifier informs us that of the 268 stocks in the Select Blue Chip universe only 30, or 11.2% are in the Undervalued category.
Conversely, 80 Select Blue Chips are in the Overvalued category. Further confirmation that valuations are stretched thin is that the dividend yield on the Down Industrials has pierced its Overvalued yield of 2.0% and sits currently at approximately 1.80%.
Given that Wall Street has been riding a gravy train of easy money and perpetual fiscal stimulus nigh on thirteen years now, the default strategy should be to press the petal to the metal until the uptrend hits a wall, which most likely will be when the yield on the 10-Year Treasury surpasses 2.0% with a head of steam.
In closing, the obvious posture for the enlightened investor is to limit buying considerations to stocks in the Undervalued category and to take gains on stocks that reach Overvalue. In that light, here is our list of Timely Ten Stocks, which represent our current best buys based on our dividend strategy.
Altria Group (MO) — yielding 6.71%
Philip Morris International (PM) — yielding 5.37%
CVS Health Corp. (CVS) — yielding 2.63%
Omnicom Group (OMC) — yielding 3.71%
Intternational Business Machines (IBM) — yielding 4.84%
Washington Federal (WAFD) — yielding 2.95%
General Mills (GIS) — yielding 3.30%
US Bancorp (USB) — yielding 3.01%
M&T Bank (MTB) — yielding 2.86%
Fastenal Company (FAST) — yielding 2.21%