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Finding Value in This Market

Alex Dumortier
January 27, 2010

Last week, Goldman Sachs (NYSE: GS  ) organized an investment conference for its "buy-side" clients to communicate its outlook for the year. Unsurprisingly, that outlook for the U.S. stock market is bullish (as former Goldman partner Roy Zuckerberg once told a trainee: "In the securities business, there's only one way to be -- and that's bullish! Always bullish!"). But beyond that homily, the Goldman gurus did say a few things worth listening to.

No more easy money lying around
Goldman's strategist Peter Oppenheimer pointed out that the spread in returns between top-performing and underperforming stocks would be wider in 2010 than it was last year. I fully agree. Last year's rally was the rising tide that lifted all stocks, high-quality and speculative alike. This year, just showing up (i.e., being invested in stocks) isn't going to do the trick. With U.S. stocks now overvalued in aggregate, there is a genuine premium on stockpicking ability.

The "credit replacement trade"
So how does one go about separating the wheat from the chaff? Oppenheimer recommended what he calls the "credit replacement trade" -- buying stocks that will pay out enough cash in dividends that their dividend yield will exceed the yield on their bonds. While I didn't look at the yield of individual issuers, it was easy enough to find six stocks with a current dividend yield that is higher than the average yield of U.S. investment-grade corporate bonds (4.88%):


Dividend Yield (%)

Bristol-Myers Squibb (NYSE: BMY