This Bear Sees a Stock Sell-Off Ahead

"Gary Shilling Sees 'Significant' Stock Selloff Within 12 Months." For me, a headline like that is like honey to a bee, so when Bloomberg posted it late last week, I couldn't help but click.

The article starts right off by making Shilling seem like one sharp fella, noting that he "predicted the U.S. housing collapse." A flip over to Wikipedia reads more like an ad for his newsletter service than a sober biography:

Shilling has an imposing record as a financial soothsayer. In the spring of 1969, he was one of only a few analysts who correctly envisioned the recession at year's end, and was almost a lone voice in 1973, when he forecast a monolithic international inventory-building fling, followed by the first significant recession since the Great Depression.

It sounds like it'd be a pretty good idea to take a closer look at what this president of an investment research firm has to say.

A bitter pill
For stock investors, the story Shilling is weaving is none too settling. In short, he sees the Fed's quantitative easing falling short, leaving economic growth muddling along for years. Shake that up with what he sees as an overvalued stock market and the expected result is the "significant selloff" mentioned in the Bloomberg headline.

Of course, it seems that much of Shilling's career has rested on trying to force-feed a lesson to investors about relying on stocks. Back in April 2009, just as the market was launching the 80% recovery that's brought us to where we are today, Shilling was deriding buy-and-hold investing and saying, "We've never understood the U.S. individual investors' fascination with stocks."

Further, Shilling's past work seems to sound a fairly repetitive note. In 1988 he published the book After the Crash: Recession or Depression: Business and Investment Strategies for a Deflationary World. In 1998 came Deflation: Why it's coming, whether it's good or bad, and how it will affect your investments, business, and personal affairs. During the postdot-com crash period in 2002 he released Deflation: How to Survive & Thrive in the Coming Wave of Deflation. Perhaps it's not all that surprising that we're seeing his name in the headlines right now. Earlier this month he released his latest, The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.

That darn note
Admittedly, I'm a bit tempted to skip over what Shilling has to say. As I highlighted above, it seems like he's been stuck on one note for much of his career, and he's certainly had miserable timing with his publishing schedule. Investors who got scared out of stocks by his 1988 book missed a massive bull run, while the stock market also posted significant gains following the release of the two books prior to his most recent.

But all along, Shilling's views have led him to recommend that investors look to Treasuries, and you know what? He's been absolutely right. The stretch between the early '80s and today has been a massive bull market for Treasuries; as yields have declined from upper double digits to the absurdly low rates of today, prices have moved in the opposite direction, making bond investors very happy campers.

So does that mean we should swallow Shilling's bitter pill and say, "Thank you sir, may we have another?" I'm not convinced.

Warm, colder, hot
To be sure, I'm only marginally more bullish than Shilling on the overall market, as measured by the S&P 500. The rally over the past few months has made equity prices a lot less attractive than they were, and while I wouldn't call myself bearish, I'm not exactly excited about overall equity prices either. So I don't think that his valuation concern is unfounded.

On the other hand, even at their levels today, I think stock valuations are far more attractive than Treasures, which Shilling is still recommending. Yes he's been right on bonds thus far, but I'm firmly in the Treasuries-are-a-bubble camp, and so I'd say listening to him right now on that front would be a little like jumping on board with a long-term equity bull in 1999 or 2000.

But I do think there's an area where the two of us might see eye-to-eye -- dividend stocks. Sure, the two of us wind up at dividend payers from different directions -- I think they're simply good investments while Shilling thinks they're the best you're going to get from the not-so-great equity asset class. But we've both ended up there nonetheless.

Let's take it one step further and see if we can find a few stocks that Shilling might give the nod. Earlier in the year, when recommending dividend payers to his clients, Shilling narrowed the field further by saying investors should be looking for companies with "meaningful, reliable and rising dividend yields."

So what I did was start with Standard & Poor's "Dividend Aristocrats" list -- which only includes companies that have raised dividends every year for 25 years -- then I narrowed it to only the companies that have a current yield of 3% or better, average annual dividend growth of 8% or better, and a payout ratio below 80%. Here are seven of the stocks that we're left with:

Source: Capital IQ, a Standard & Poor's Company.

Shilling would likely see most of these as stocks that you could invest in to have some defense against lousy overall equity markets. I look at these and see legitimately solid investments that are backed by companies that know how to reward their shareholders. Either way, if you want to bolster your portfolio, these stocks aren't a bad place to start.

Motley Fool co-founder Tom Gardner knows that no matter where you stand, the key is to bring a passion to it.