Tipping Cash Cows

12/29/2011 10:00 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The fashion for dividend stocks is drawing some sniping from the sidelines, writes MoneyShow.com senior editor Igor Greenwald.

There are no atheists in foxholes, they say. And also, they should add, no doctrinal disputes like those between the last adherents of the same small, dying religion.

Stocks have certainly been through a lot this year. And now the few brave souls who haven’t sought safety in cash or capital appreciation in bonds are arguing over exactly what sort of stock won’t stab them in the back.

The apparent bone of contention is the generally superior performance this year of dividend-paying stocks over the higher-risk, more growth-oriented equities. A recent Wall Street Journal story on the subject cited research showing that the fattest dividend plays in the S&P 500 have left the stingiest index members in the dust in terms of share price appreciation in 2011.

But it also cited concerns about income stocks being a crowded trade as well as the latest marketing tool for money managers. Another cynic wondered why the pros were pushing Procter & Gamble’s (PG) modest upside, yield and all, over the much richer free cash flow yield of Apple (AAPL) and Google (GOOG).

One answer is that in these uncertain times a dividend in hand is worth more than cash on corporate books. Another is that we’re all a very risk-averse lot these days, to the point where limited upside and a decent dividend may sound better than a good shot at a big score to some investors.

In truth, Apple hasn’t exactly been neglected, with shares up 25% this year. And Google is up 30% since October 3, so its potential isn’t exactly lost on many, either.

Fans of dividends point to the superior returns and risk profile they offer relative to Treasuries. The mind rebels against the notion of a heavily indebted government selling IOUs at price of 50 times their fixed “earnings.”
Suddenly, P&G’s trailing price-earnings ratio of 17, coupled with a 3.2% yield, starts looking like the deal of a lifetime.

It all sounds a bit like a debate about whether the hammer or the pliers are the superior tool and the only one worth having around.

The potential of Apple and Google shouldn’t bear on the appeal of McDonald’s (MCD), the best performing blue chip this year. The fast-food chain’s 2.8% yield is far from its biggest attraction—that would be its ability to generate steady double-digit growth even in tough times. McDonald’s is selling the precious commodity called time to the world’s emerging middle class based on a business model proven over decades and across continents.

And just because Home Depot (HD) yields 2.8% doesn’t mean it’s not poised for significant capital appreciation once the real estate and construction markets turn. It’s silly to lump it with a utility.

The stocks every investor needs most are the good ones offering the best risk-reward profile, whether that means relatively low risk or high potential rewards. It’s nice to know what’s in fashion. But we do ourselves no favors by sorting based on yield.

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