As the Dow reaches highs not seen in nearly five years, people are coming up with all sorts of reasons not to invest. Clearly, investors are getting nervous that the best gains in the market are behind them. As a financial advisor, I heard many of these justifications before.
- "There's an upcoming presidential election."
- "I'm waiting until after the new year."
- "I want to first see what happens with whatever-bill-is-pending-in-Congress."
But in my years in the business, I've found only two valid reasons that a person shouldn't invest in the stock market.
- You don't have the money.
- You don't have the time.
If you don't have several months' worth of living expenses saved in a liquid account, then, yes, you aren't quite ready to invest in the market. Or if you need money available for a particular short-term goal -- say, buying a home within the next couple of years -- then yes, that money shouldn't be invested in the market, either.
But if you don't fit either of these two profiles, you need to have a portion of your money in the stock market in order to meet your mid-to-long-term financial goals. Why? Because, over time, no other asset class has the potential to outpace inflation the way stocks do.
Stack the deck in your favor
To start, focus on stocks trading at enticing valuations. Also, look for stocks that pay attractive dividends. Think of them as an extra incentive to stay invested when (not if) the market gets choppy down the road. Stocks with low dividend-payout ratios have more wiggle room to increase their dividend over time, effectively giving you a pay raise.
Check out five companies that fit these criteria:
|
Company |
P/E Ratio |
Dividend Yield |
Payout Ratio |
|---|---|---|---|
|
NextEra Energy
|
14 | 3.5% | 45% |
|
Bank of Hawaii
|
13 | 3.9% | 50% |
|
Valero Energy
|
10 | 2.2% | 17% |
|
Guess?
|
10 | 3.1% | 24% |
|
Caterpillar
|
9 | 2.3% | 21% |
Source: Yahoo! Finance.
These five stocks each boast a price-to-earnings ratio less than the S&P 500's current P/E of roughly 16. Also, all five companies pay a dividend greater than the average 2% dividend yield of S&P 500 companies.
Let's take a closer look at each of these companies.
NextEra Energy
Environmental concerns help drive increased investment in renewable energy. When it comes to renewables, NextEra is the largest generator of wind and solar power in the U.S. The company plans to expand its total electricity capacity from wind by 14% in 2012. And a partnership with General Electric in a California solar facility will increase NextEra's solar capacity by nearly 90%.
Bank of Hawaii
Banks sometimes juice earnings by setting aside less money for bad loans and instead trickling that money down to their bottom lines. But despite setting aside more money for bad loans, Bank of Hawaii has still increased its bottom line by doing business the good old-fashioned way -- increasing revenues and keeping costs under control.
Valero Energy
Downstream oil and gas companies like Valero specialize in refining, thereby avoiding the costs and risks associated with the upstream exploration and discovery part of the process. By doing so, Valero reduces its potential for sizable returns, but also reduces its inherent risk profile.
Guess?
Leading apparel brand Guess? is geographically diversified, with stores in more than 80 countries. A very profitable segment for the company is licensing: Guess? licenses its brand to makers of accessories, shoes, and fragrances. Guess? boasts nearly $300 million in cash and virtually no debt. Insiders hold an impressive 31% of outstanding shares.
Caterpillar
Demand for infrastructure build-out in developing nations is rapidly increasing. And the needs aren't just an issue for emerging markets -- the U.S. now ranks 23rd compared to other countries for overall infrastructure quality. Worldwide infrastructure needs will keep the world's largest construction equipment manufacturers, like Caterpillar, busy. Even though Caterpillar recently lowered guidance and faces increasing competition in the very lucrative mining equipment space, I still think it's a great buy for the serious, long-term investor.
Foolish bottom line
The best time to get into the stock market is when you have the money available and time on your side. If you fit this profile, then consider these five stocks for your portfolio today.
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