Recs

161

Investors Are on the Verge of Disaster

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Unemployment is staying stubbornly high, negating a continuation of last year's recovery. A resurgence in the housing market seems dubious. Recently, prestigious Yale University professor Robert Shiller estimated the chances of a double-dip recession are greater than 50%.

It's no wonder there's a mass exodus out of the stock market while cash is flowing into bond funds faster than an Allen Iverson crossover. People are concerned about their future, and their main priority, in the short term, is safety and preservation of capital.

Nevertheless, I'm here to tell you that your investing strategy is most likely on the verge of disaster.

Where's everybody going?
In the frenetic craze to find security for their portfolios, investors are jumping on the bond bandwagon, despite terrible returns. Recently, yields for a 10-year Treasury fell as low as 2.5%, while savings accounts and CDs are dishing out dismal, less-than-1% returns. Yet still, the rush remains:

  • According to the Investment Company Institute, bond funds have attracted more capital than equity funds for 30 straight months, the longest such stretch in 23 years.
  • Despite a historically low multiple of price to prospective earnings below 13 for the broad market according to Morningstar, investors aren't creating big demand for stocks, as the S&P 500 index is still down for the year.

Don't get me wrong. There's plenty of reason to be worried about the market. Just like everyone else, I'm slowly watching the value of my portfolio decrease as my investments take unwarranted plunges into deeper water. However, regardless of what your macro outlook is, you still need to stay invested in stocks.

Why? Because equities have the ability to provide income, to grow at significant rates, to protect your portfolio against potential inflation, and fixed-income investments just can't offer that same set of qualities. Simply put: Investing in stocks is the only way to secure a safe and prosperous retirement.

Please avoid this mistake
Now I'm not saying that you shouldn't have some of your hard-earned cash in bonds or bond funds. Quite the contrary, maintaining a portfolio with proper asset allocation is crucial, so you should definitely have a significant portion of your money in bonds. But avoiding stocks all together is a huge mistake, and it seems as though it's one that thousands of individuals are making right now.

To try and talk you out of this enormous blunder, I've decided to find seven stocks that I think are totally worthy of your time and money. It's no secret that I'm a huge fan of dividend stocks. They outperform their peers and offer you both growth and income. So I searched for stocks that pay a dividend higher than that 2.5% yield on the 10-year Treasury and that have been able to increase those dividends over the past five years -- no easy feat considering the 2005-2010 time period. Lastly, I looked for companies with low forward price-to-earnings ratios to help ensure value.

Below are seven companies that I strongly feel any investor, young or old, could invest in today and hence would be better off than pouring more money into any old stodgy bond fund:

 

Dividend Yield

5-Year Dividend Growth

Forward P/E Ratio

Annaly Capital Management (NYSE: NLY  )

15.7%

8.9%

7.0

Eli Lilly & Co. (NYSE: LLY  )

5.8%

5.9%

7.3

Hudson City Bancorp (Nasdaq: HCBK  )

5.2%

19.8%

10.5

Exelon (NYSE: EXC  )

5.2%

6.9%

10.4

ConocoPhillips (NYSE: COP  )

4.2%

14.5%

8.5

Kraft Foods (NYSE: KFT  )

3.9%

7.2%

14.7

SYSCO (NYSE: SYY  )

3.6%

11.3%

13.7

Source: Capital IQ, a division of Standard & Poor's. Growth = compound annual growth rate.

You may be thinking to yourself that instead of investing in these stocks, you could just buy an index fund and diversify your risk. In fact, many of you are doing exactly that -- only one of the top 10 best-selling funds in 2010, the Vanguard Total Stock Market Index (FUND: VTSMX  ) , is a stock-only fund.

However, the total stock market index fund averages a dividend yield of 2.6% and a forward P/E of 13.1; almost every stock listed above is cheaper than that and pays a more substantial dividend! In addition, I purposely chose stocks that were not only properly diversified, but that also have recession-proof characteristics. Health care, utilities, and food services are all sturdy sectors, and maintaining exposure to commodities and financials is a great way to round out your miniportfolio.

Step up to the plate
I know it's not easy to start investing in stocks right now. There are so many question marks regarding global growth, federal deficits, and the future of equity premiums that no one would seriously blame you for sitting on the sidelines.

But you have to understand that investing solely in an index or a bond fund may provide comfort, but it won't help your money grow at a sustainable rate. Once you're near retirement, you'll need to withdraw a significant portion of cash to pay for your monthly expenses, and having money invested in proven dividend-paying stocks is the best way to ensure that cash is safe and sound.

Interested in how a retiree can get rich? Click here to read the article!

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Jordan DiPietro owns shares of Exelon. Exelon and SYSCO are Motley Fool Inside Value recommendations. SYSCO is a Motley Fool Income Investor recommendation. The Fool owns shares of Annaly Capital Management, Exelon, and SYSCO. Try any of our Foolish newsletter services free for 30 days. The Motley Fool's disclosure policy will always have a soft spot for Allen Iverson in a Sixers uniform.


Read/Post Comments (30) | Recommend This Article (161)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 07, 2010, at 6:14 PM, Notations wrote:

    "Investors Are on the Verge of Disaster"

    Uh, -- So why is the article title warning investors of disaster? There's nothing about authentic doom in the article.

  • Report this Comment On September 07, 2010, at 6:18 PM, gimponthego wrote:

    I avoid Funds, Financial Advisers and Brokerage Houses. I do my own DD. Being retired since I was 50 because of a degenerative disability, I've always traded in my IRA. I've not only remained solvent..but made a tidy profit. Remember, I started out with a finite amount and have not been able to contribute since I don't work. Actually, I do! From 7:30AM to 4PM on trading days and at my leisure on the weekend.

    Do it your self, my friend. We should have learned our lesson regarding forking over our money to someone else. I would rather run around the block than give a penny to someone else and expect them to really work on my behalf..and, I'm in a wheelchair..and life is swell!

  • Report this Comment On September 07, 2010, at 6:35 PM, TMFHockeypop wrote:

    1. Looking in the rear view mirror Vanguard ST bond index YTD is 4.14%, Intermediate 11.47%, intermediate Treasury 9.56% and LT bond 16.22%. Vanguard High Yield Dividend index is 0.52% YTD, but Dividend Appreciation index is 1.0% If yOU had advised bonds instead of dividends in December, 2009 I would be impressed (but would have thought you crazy).

    2. Why are the dividend stocks you recommend in this article different from the ones you recommended before? Which is second string?

  • Report this Comment On September 07, 2010, at 6:44 PM, richie54 wrote:

    Jordan, You should take a look over at CNN.com and see what the Generation Y people had to say today about investing in today's environment. At the very least, you have a lot of young people who should try subscribing to The Motley Fool on a trial basis.

    Very scary stuff!

  • Report this Comment On September 07, 2010, at 6:59 PM, TMFPhillyDot wrote:

    @richie54,

    I'd be curious to know exactly what was so scary at cnn.com? Although of course I agree, more and more young people should (and are) becoming active with The Motley Fool.

    Thanks for the comment!

    Jordan (TMFPhillyDot)

  • Report this Comment On September 07, 2010, at 7:46 PM, esy0345 wrote:

    We are only waiting for the market to crash, and then we will go back to stocks at much better values. We are not keeping them in bonds, which would be foolish. It WILL crash to be sure, and only the foolish BandAids that Fed and Administration keep applying are keeping it from crashing. The longer they artificially keep the natural forces at bay, the harder it will fall. It would be a disaster to take your advice now until this happens and lose even more money. Will iCal your article for one year from now when you will have to eat crow.

  • Report this Comment On September 07, 2010, at 8:38 PM, IBAKAMERICA wrote:

    I hope that when all those who love the good old USA as much as their money will hang in there and give the economy a chance. The country needs our support and financial backing. I have lived long enough now to know that some reccessions take a little longer to end and get better. This no time to take the Chicken Little- The Sky is Falling approach. Hang in there and it will come around. The bigger the bang, the bigger the buck will be. We have had the big bang, the big bucks will follow. Don't run for the hills, America needs your investments. If enough of investors leave the market, I will gladly buy up as much of their share as I can at cheap prices.

  • Report this Comment On September 07, 2010, at 9:01 PM, Kiffit wrote:

    It seems to me that if one is concerned about a double dip recession and a US economy that is likely to copy the Japanese scenario (with a stock market that is still around a fifth of what it was in 1988 and a Real Estate market that will never recover), one needs to do a bit more than just buy good stocks with good recessional prospects. In such a market even they are likely to get a hiding.

    In a deflationary economy, cash is king, at least for a while, until one has worked out which surviving companies aren't zombies and have a life expectancy longer than twelve months.

    If one must own stocks, it would seem wise to hedge them with puts. Better, get rid of the stock and just buy puts; and all this with none of the margin hassles and risk of shorting to boot.

  • Report this Comment On September 07, 2010, at 10:03 PM, ChrisBern wrote:

    @Kiffit - +1, that's exactly how I feel. Articles such as this are ignoring deflation and the possibility (probability?) of a 4-6 year deleveraging cycle that will, at best, keep equities stuck in neutral. Yeah you could then make the argument that the article's mentioned dividend rates are higher than bond rates--but don't forget about capital appreciation and depreciation. A long bond that goes from 4% to 3% (Japanese style) has a HUGE upside. And equities during a debt deleveraging have a HUGE downside (see Nikkei). Besides, does anyone really think we'll be seeing higher rates in the next year or two? Not me.

  • Report this Comment On September 08, 2010, at 2:09 AM, TMFEdyboom223 wrote:

    I'm 26 and have been investing since 23. Do I qualify as one of the young guys?

  • Report this Comment On September 08, 2010, at 4:46 AM, lowmaple wrote:

    edyboom223 Your'e a baby

  • Report this Comment On September 08, 2010, at 9:46 AM, Stockgamblr wrote:

    According to Kiplinger magazine, dividends may be taxed up to 40% in the near future, after elections of course. It's something to consider with those high dividend stocks.

  • Report this Comment On September 08, 2010, at 10:55 AM, norm1834 wrote:

    In a previous Motley Fools article the newsletter

    threw HCBK under the bus saying the banks's

    reportings of their earnings were suspicious----

    Lets make up our minds!

  • Report this Comment On September 08, 2010, at 3:58 PM, TMFPhillyDot wrote:

    @Stockgamblr,

    It is very true that the dividend tax may see a big rate hike, and will definitely play a part in your investing strategy. However, it doesn't necessarily mean that dividend stocks are now less important, than say, bonds.

    Here's a great article on the "bond bubble": http://www.fool.com/investing/general/2010/09/03/bond-bubble...

    Best,

    Jordan (TMFPhillyDot)

  • Report this Comment On September 08, 2010, at 11:13 PM, altruria wrote:

    If you have a roth IRA thats the place for your dividend stocks! Since you get no tax advantage in the roth for losses it's also the best place for your steady growers.

  • Report this Comment On September 09, 2010, at 1:42 AM, mtracy9 wrote:

    "In spite of all the great and minor calamities that have occurred this century -- all the thousands of reasons that the world might be coming to an end -- owning stocks has continued to be twice as rewarding as owning bonds. Acting on this bit of information will be far more lucrative in the long run than acting on the opinion of 200 commentators and advisory services that are predicting the coming depression." --Peter Lynch

    http://shouldersofgiantsinvestor.com

  • Report this Comment On September 09, 2010, at 5:01 AM, yaiwolf wrote:

    I agree with you Jordan on this one..however, the "herd" is over at the bond rally. When momentum

    swings back to stocks... they will be back.

    Traders control this market today.. not investors.

  • Report this Comment On September 10, 2010, at 10:58 AM, kariku wrote:

    Enough panic already. Enough with "European woes", "Double dip" and s**t like this. We get it.

  • Report this Comment On September 10, 2010, at 11:45 AM, scanlin wrote:

    In addition to being in dividend paying stocks (good idea) you should consider writing out of the money covered calls against them, in order to get an extra 12 dividends per year. Probably add 3-6%/year yield through call premium and still leave yourself 5% or more upside potential on the underlying.

    MikeS

    http://www.borntosell.com

  • Report this Comment On September 10, 2010, at 11:45 AM, rmackinnon wrote:

    While the Fool is on the subject of Disaster it would be beneficial to warn everyone about the special dangers of bond funds. Unlike separate bond holdings, funds have no maturity date. When rates rise, as they surely will, the NAV of the fund falls causing investors to bail out and, therefore, causing forced sales of fund holdings which locks in losses. Those who don't bail get stuck with the losses. There has been way too little discussion about this in the press. Bond funds should be labeled "unsafe".

  • Report this Comment On September 10, 2010, at 11:48 AM, SUPERMANSTOCKS wrote:

    Nothing has changed over the last year isn't this article a little late?

  • Report this Comment On September 10, 2010, at 12:37 PM, mustang28027 wrote:

    It's a WOLRD economy. Choose stocks that are multinational and pay a good dividend. Diversity is key.

  • Report this Comment On September 10, 2010, at 12:45 PM, MW7 wrote:

    I appreciate the table provided. I am new to this but have benefitted from some touted, over-broad elements of trading: have a plan, execute the plan, looking for dividend stocks of good repute. So I celebrate those elements and have put the table in my trading journal. Thank God for capitalism. And carry on Jordan, I am taking notes.

  • Report this Comment On September 10, 2010, at 1:36 PM, nojack wrote:

    I also agree with Jordan. His forecast is right on the money. There is no where else to go. Equities are where we should stay. Diversity, dividends, and watch it go up, down, sideways, and then up again.

  • Report this Comment On September 10, 2010, at 1:48 PM, TMFPhillyDot wrote:

    @rmackinnon,

    I couldn't agree with you more. My foolish colleague Dan Caplinger recently wrote an article you'd be interested in, be sure to check it out: http://www.fool.com/investing/etf/2010/09/01/the-true-risk-o...

    Thanks for the comment!

    Jordan (TMFPhillyDot)

  • Report this Comment On September 10, 2010, at 1:55 PM, TMFPhillyDot wrote:

    @MW7,

    Glad to see you on the comment board and reading investing sites as a beginner. There's no better way than to research & read as much as you can. Good luck during your investment search, now is certainly as interesting a time to start as ever!

    Best,

    Jordan (TMFPhillyDot)

  • Report this Comment On September 10, 2010, at 6:11 PM, mtracy9 wrote:

    "In spite of all the great and minor calamities that have occurred this century -- all the thousands of reasons that the world might be coming to an end -- owning stocks has continued to be twice as rewarding as owning bonds. Acting on this bit of information will be far more lucrative in the long run than acting on the opinion of 200 commentators and advisory services that are predicting the coming depression." --Peter Lynch

    http://shouldersofgiantsinvestor.com

  • Report this Comment On September 11, 2010, at 9:28 AM, rav55 wrote:

    Oh no it's the

    "JORDAN DIPIETRO OMEN"

  • Report this Comment On September 11, 2010, at 10:39 PM, Tri3 wrote:

    THE ECONOMY MIGHT RECOVER

    Imagine that the Congress, after midterm elections, has gridlock.

    Imagine that the federal government runs out of ways to waste money on ways to diddle with the economy.

    Imagine that the Federal Reserve adopts my plan for FLOATING INTEREST RATES.

    There's at least a .5% chance that the economy will recover.

  • Report this Comment On September 11, 2010, at 10:48 PM, Tri3 wrote:

    I just read the Peter Lynch quote posted by Rav55.

    WE'RE IN A DEPRESSION

    The best measure - largely ignored - is THE NUMBER OF WHITE COLLAR, PRIVATE SECTOR jobs.

    When college educated, middle class workers can't get jobs flipping burgers, the economy is down about as far as it can get.

    Can it get any worse? Only if government squanders every last nickel on stimulus programs.

    Look up "military keynesianism". After 13 years of raging depression, from 1929 to 1942, and every form of government program, world war created full employment.

    http://en.wikipedia.org/wiki/Military_Keynesianism

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1292931, ~/Articles/ArticleHandler.aspx, 12/21/2014 10:11:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 17,804.80 26.65 0.15%
S&P 500 2,070.65 9.42 0.46%
NASD 4,765.38 16.98 0.36%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/19/2014 4:02 PM
COP $70.98 Up +1.23 +1.76%
ConocoPhillips CAPS Rating: *****
EXC $37.61 Up +0.08 +0.21%
Exelon CAPS Rating: ****
HCBK $10.01 Up +0.07 +0.70%
Hudson City Bancor… CAPS Rating: ***
KRFT $63.51 Up +0.13 +0.21%
Kraft Foods, Inc. CAPS Rating: ****
LLY $72.40 Down -0.05 -0.07%
Eli Lilly & Co. CAPS Rating: ****
NLY $11.33 Up +0.10 +0.89%
Annaly Capital Man… CAPS Rating: ****
SYY $40.47 Down -0.27 -0.66%
Sysco CAPS Rating: *****

Advertisement