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Blue Chips, Yield, and Value

11/05/2014 9:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

When all other factors which rate analytical consideration have been digested, the underlying value of dividends, which determines yield, will-in the long run-also determine price, explains Kelley Wright, editor of Investment Quality Trends.

Individual stock prices fluctuate between repetitive extremes of high dividend yield and low dividend yield. These recurring extremes of yield establish Undervalue and Overvalue price levels.

When a dividend is raised, the Undervalue and Overvalue price levels are raised automatically so they will continue to reflect the historically established yield extremes. Each stock has its own distinctive high and low yield characteristics and must be evaluated individually.

There has been an unusual period of complacency in the market is one of the few things that many market observers can agree on. What gets lost with complacency, which is dangerous, is that markets, over the long-term, are nothing if not cyclical.

This is to say that, even in a long-term secular move, be it up or down, there are cyclical countertrends because no market can go up or down in a straight line for an extended period without adverse consequences.

These cyclical countertrends are important to the long-term health of the market because they keep sentiment in check.

Whenever there is excessive optimism or pessimism, it creates an imbalance that eventually must be worked off and these work-offs are generally unpleasant affairs for, at least, one-half of market participants.

What concerns me is that the severity of these work-offs are, in part, determined by the amount and length of the move that precedes the necessity for a work-off.

This to say that the longer the market goes without sentiment being rebalanced, investors become even more complacent and-for lack of a better term-greedy.

Unfortunately, the most effective cure for this condition is a selloff sufficient in degree and time that drives a stake through the euphoria and brings sentiment back into equilibrium.

Meanwhile, our primary purpose is to assist subscribers in growing their capital and income base from which to generate cash for their current and future needs.

To that end, we believe that shares of high-quality stocks purchased at an historically repetitive area of low-price/high-yield offers the greater potential for downside protection and upside appreciation.

The Timely Ten, therefore, is not just another "best of, right now" list. Rather, it is our reasoned expectation based on our methodology and experience, that these ten currently Undervalued stocks offer the greatest real total-return potential over the next five years.

  • CVS Caremark (CVS)-yield 1.3%
  • ConocoPhillips (COP)-yield 4.1%
  • Coca-Cola (KO)-yield 3.0%
  • Baxter International (BAX)-yield 3.0%
  • Chevron Corp. (CVX)-yield 3.7%
  • AT&T (T)-yield 5.3%
  • Philip Morris Int'l (PM)-yield 4.5%
  • Occidental Petroleum (OXY)-yield 3.3%
  • Wal-Mart Stores (WMT)-yield 2.5%
  • International Business Machines (IBM)-yield 2.7%

Do we believe that all ten will appreciate simultaneously or immediately? Of course, not.

Our four-plus decades of research and experience, however, leads us to believe that these stocks, purchased at current Undervalued levels, are well positioned for both growth of capital and income.

Whether you are building a portfolio from scratch, are partially invested and seeking new positions, or are fully invested and in need of some affirmation and hand holding, The Timely Ten represents our top ten recommendations.

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