The Simplified Investor

It seems like the wrong time to be buying stocks right now, considering that every day the market hits a new bottom. On Thursday, markets closed at their lowest point in nearly six years, with the Dow Jones Industrial Average finishing the day at 7,552.29. And its not just stocks that are hurting; oil is below $50 a barrel and 30-day Treasury bonds are yielding less than 1% as investors demand safe havens for their money…its ugly on Wall Street, and people’s savings on Main Street have felt the pain.

But smart investors know that when the market looks bleak, opportunity abounds. Plummeting stock prices means that your existing holdings are dragging, but it also means those stocks you’ve been watching for months are ripe for the picking. But which ones to hone in on, when it seems like every stock on the market is attractively priced?

One thought is to go big for value. This means large, stable companies that earn consistent revenues in good times and in bad. If you like that strategy, check out the Price-to-earnings ratio of stocks in the Fortune 500. Most of these big name brands aren’t at risk of bankruptcy, even in a recession, and their P/E becomes more attractive as stock prices plummet but earnings stay relatively stable. Here’s some examples:

• Exxon Mobil (XOM) - 7.41 P/E
  
• Walt Disney (DIS) - 8.25 P/E
• Microsoft (MSFT) - 9.18 P/E

At such low prices relative to their earnings these stocks seem like big bargains, especially if you believe we’re in a bear market and that stock prices are approaching a bottom. If you get in now, while stock prices are low, you’ll reap the benefits of the market’s growth as investors slowly come back to stocks and resume paying a premium for company earnings.

But some investors might think we’re not seeing a bear market, and instead a market correction. In other words, what we saw before the fall was an inflated, over-priced market, and now we’re paying the price. But for these conservative, glass-is-half-empty folks, there’s another metric to watch - dividend yield.

A lot of big name companies have a history of rewarding their shareholders with a percentage of their profit, in the form of a quarterly dividend. Dividend yield measures how much a company pays out in dividends relative to its share price. While the dividend percentage is at the company’s discretion, stocks with a history of paying big yields are likely to do so again in a recession, to keep shareholders happy and maintain a floor on the stock’s price. Here’s three companies who payed big yields last year:

• Pfizer (PFE) - 5.10% dividend yield
  
• Wells Fargo (WFC) - 3.91% dividend yield
• General Electric (GE) - 3.10% dividend yield

A nice dividend yield is especially attractive to investors who think stocks are going to keep falling, or stay flat over the next six months. And that might very well be the case, as the financial services industry sorts out its mess, auto makers struggle, and home prices continue to hold their breath at the bottom of the pool. Pick up a few stocks with nice dividends and stable earnings, and you’ll still get paid even if the value of your shares stays flat. It’s an important point to consider when many signs point to a prolonged recession.

Tags: DIS, Disney, Dividends, DJIA, Dow Jones, Economy, Exxon Mobil, GE, General Electric, Investing, Microsoft, MSFT, P/E, PFE, Pfizer, Price to earnings, Recession, Stocks, U.S. Economic Cycles, Wells Fargo, WFC, XOM

This entry was posted on Thursday, November 20th, 2008 at 7:51 pm and is filed under 2008 Financial Crisis, Stocks, U.S. Economic Cycles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.