Collect Quality Bargains on the Pullback
By Richard Band, Profitable Investing
It’s flattering to have the world beat a path to your door. But I’ve got to admit: The big run-up in dividend-paying stocks since Jan. 1 has made my job as a value investor tougher. As prices rise, yields fall for new investors (unless, of course, the company in question boosts its dividend faster than the share price goes up).
Fortunately, the past few weeks have brought a decent — and long overdue — “correction” among many of the market’s prime dividend stocks. Utilities, real estate trusts and master limited partnerships have all backtracked. If you’ve been looking to feed some cash into these sectors, prices and yields are now more favorable than we’ve seen them in about three or four months.
For the broader stock market, the key question now is whether bond yields, which have surged since early May, will finally calm down. (Rising bond yields diminish the relative appeal of equities for investors who can choose to own either asset.) If interest rates ease in fairly short order — as I expect — the S&P 500 should be able to reach my target of 1680-1710 during the summer, or at latest sometime in the fourth quarter. Beware, though, of any two- or three-week stock rally not accompanied by falling bond yields. That would invite a severe setback.
Given the heightened interest-rate tensions (to say nothing of the usual economic problems in Europe and elsewhere), this is a time for extra selectivity in your stock purchases. Focus on companies with a proven record of compounding investor wealth over the long haul.
One great consumer-staples franchise has dipped back into the buy zone lately. Swiss-based Nestle (NSRGY) stands at the top of the heap as the world’s most admired consumer food-products company, according to Fortune magazine — a ranking Nestle has enjoyed eight years in a row. Sales to fast-growing emerging markets have soared from 30% of the company’s total in 2001 to 43% in 2012.
Nestle has also taken good care of its shareholders. Dividends, paid annually in May, have been sweetened for 17 consecutive years. Over that span, the payout has increased 673% in Swiss francs, a much stronger currency historically than the dollar. NSRGY truly qualifies as a world-class wealth compounder.
Current yield is 3.4%. Better yet, by holding the shares in your pension fund or IRA, you can avoid Swiss withholding tax on your dividends.
If I had to buy just one European stock and keep it for the rest of my life, Nestle would be it. Buy NSRGY at $67 or less for a projected total return of 15% or more in the year ahead.