Tuesday, April 14, 2009
(Cont'd from above)...

Jim (cont'd):   

Second, companies with decent fundamentals that are trading at or near their cash… this is a no brainer… eventually that cash is either going to be put in a floor, or put the floor in, or will allow the company to do something that will take the stock higher… in other words, if there is a company that is selling thru its cash… there is another company that is going to come in and buy it for the cash.

And third, the strategy that I want to talk about right now… you should be buying what I call the accidental high yielders… what is an accidental high yielder…. it is a company that before getting hit with enormous declines, paid a modest, maybe some would even say meager dividend… because it was very cautious… then after its share price fell precipitously… it became a high yielder… this is like an ugly duckling into a swan of a 4% yield… not because it wanted to… but because the market relentlessly pushed down its stock… the market kept giving it the business… we can trust the accidentally high yielders most of which are industrial companies, like a Nucor or a Caterpillar… because they never really paid big dividends to begin with… they were stingy… normally when you see a company with a big yield and in times of a really awful bear market like we have seen… you will see some smoke stack industrial stock yielding upwards of 6 or 7.

The big danger is that the dividend will be cut… high yields are more often a sign that something is wrong… than a sign that something should be bought… but the accidental high yielders do not fit that profile… even if their earnings are about to be chopped to pieces by a dire economic slowdown, and you should expect that to happen to their earnings… plan for the worst, and I would tell you to hope for the best… but hope is not part of the equation… these companies will still be able to afford to pay that dividend because they always kept it small… they were able to pay the dividends in past recessions… they can pay it in the current one… that is one reason to like the accidental high yielders… the dividend is reliable… now, nothing is etched in stone… no dividend is completely 100%… if we go into the second Great Depression… the theory may not work as well.

The second reason, is drop dead obvious… they are paying you lots of money just to sit in the stock… never dismiss dividends just because they tend to be where older, more conservative investors go for income and not growth… money in your pocket is money in your pocket… that yield can augment your returns… and in fact if you reinvest it in the stock, and you have got a long term horizon, it can make you plenty of money even if the stock totally sits still… this is the rule of 72... if you reinvest your dividends into the stocks that paid them… they will compound over time… and with any of the compounds you divide 72 by the yield to find out how long it will take for your money to double… so if you buy an accidentally high yielder that has got a 5% yield… you will double your money in the stock in 14 and a half years… a little less actually because the rule of 72 is just a rule of thumb… and this is even if the stock goes nowhere.

Does 14 years seem like a long time… it shouldn’t when it comes to your retirement portfolio… it is where you need to think in terms of 14 years… it is where you need to think in terms of decades… not months or years… in the down market a stock that is yielding a 4%, 5%, or 6% is not to be ignored, simply for the yield… especially if it is the kind of company that you never expected to have a juicy dividend payout… and remember also, that a lot of the S&P’s performance has come, almost half, has come from the dividend portion… not just the capital gain.

The way to buy these stocks and to sell them is to use wide scale space, not on the stock price, but on the yield… what does that mean… it means to buy some and then buy some more when it yields more… lets use an example, you want to buy 200 shares of an accidental yielder… the accidental yielder is paying out 4%, that is when you buy 50... only 50, a quarter of your position… because in an awful market you can bet that stocks can go lower… and that means the yield is going lower… you buy the next 50 shares when the stock yields 4.5%… and the next at 5%… you have got the picture… the corollary to buying an accidental high yielder like this is that if you have any kind of trading mentality… if you have to sell them when the market rallies and the yield drops below 4%… why… because we like these stocks when the market stinks… that means that we believe that stocks in general are going down and that rallies are ephemeral.

The smart thing is to buy the stock back later after it falls and it is yielding more than 4% again… this is the big 2008 strategy… goes down you buy, as it goes down you buy more, and as it goes up you scale out… now you don’t have to sell when the stock falls below 4%… nobody is going to put a gun to your head… and if they do, you need to tell them to take the gun away… but you definitely shouldn’t buy more.

Here is the bottom line…

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