2012 Outlook For High Yield Dividend Paying Stocks for Retirement

This past year was one of many ups and downs in the market but oddly enough the stock indexes ended the year just about where they started with the S & P 500 index ending down a mere 0.04 points below the beginning of the year. We enter 2012 with a mixed bag of factors. The US economy seems to be getting stronger, but our congress remains as gridlocked as ever. The European financial problems, while temporarily calm, have not been resolved, and will likely rear their ugly heads again. Meanwhile Iran is threatening to blockade the Strait of Hormuz, the only passage way for oil to go from the Persian Gulf to the Arabian Sea. This would stop the flow of oil out of the middle east to the rest of the world. Iran is making this threat as a counter to Europe and the US increasing sanctions to prevent them from building a nuclear bomb. This is a very volatile, unpredictable, and dangerous situation with no easy solution. Hopefully calm heads will prevail. With the death of Kim Jong IL in N Korea no one knows how his son Kim Jong Un will act as the new leader of this wayward communist country. Initial indications are that he will be as despotic as his father…time will tell. Domestically, interest rates are at historic lows, unemployment rates are coming down, albeit at a glacially slow rate, holiday retail sales beat expectations, corporate earnings have been generally good, troops have returned from Iraq, the Occupy Wall Street movement has caused the populace and congress to stop and think, and of course it is an election year. Just like last year, we enter 2012 with no clear direction and many many variables most of which are unpredictable, all of which will impact the markets.

There are some things that are predictable. The FED has told us that they will not be raising interest rates until 2013, so it is reasonable to believe that the current favorable rate environment will stay as it is for at least the next 12 months. This is good for all borrowers, and good for businesses large and small. On the short term it is good for high yielding equities that are interest rate sensitive such as Mortgage Real Estate Investment Trusts, Business Development Companies and Oil and Gas Master Limited Partnerships. The tricky part is that when rates start to rise, which they will eventually, these high yielders will be impacted negatively. When the market begins to anticipate coming rate increases these shares will most likely drop ahead of the interest rate increase by anywhere from 6 to 12 months in advance. So now is a time to be very vigilant and perhaps to begin paring down investments in these asset classes. Clearly bonds will be hit the same way in as much as low interest rate paying bonds will suffer significant capital losses when new bonds are issued with higher returns.

It is also reasonable to believe that the world’s current dependence on fossil fuels will continue for at least the near term future. It is likely that the US will be making major moves to become less dependent on oil from the middle east and will enhance our energy relationships with Mexico and Canada, but most importantly, the US will likely allow the stepping up of domestic production of both oil and natural gas. With the development of new “fracking” techniques and the exploitation of Bakken shale, Marcellus Shale, Utica Shale, and other recent finds in oil and gas, it is very likely that the US will not only significantly reduce its dependence on the middle east, but may become net exporters of natural gas and liquid natural gas. This will mean a build up of the drilling, pipeline, storage etc. infrastructure and will be a boon to this industry.

We know for sure that this is an election year. I will not make any predictions about the result of the election, but I do know that every incumbent believes that reelection is more likely when the economy is strong and growing. Additionally improving consumer confidence bodes well for those seeking reelection and both the White House and our congress will do everything in their power to improve the economy, reduce unemployment and raise consumer confidence so that those in power will remain in power.

We also know that there are many large blue chip companies that have been growing over the past 10 years, quietly raising their dividends, increasing productivity and expanding globally yet their stock prices have remained in the doldrums. You have to look no further than our largest retailers and biggest conglomerates to see this. My experience has been that “water always seeks its own level” and that in the end strong fundamentals will overcome everything else, meaning that we should expect to see some strong movement among some of the biggest and the best blue chip stocks. A little research will show you exactly where. Such lists as Dividend Aristocrats, Dividend Champions, and for that matter the Dow 30 are good places to find plenty of these “under-performers.”

There continues to be plenty of opportunity in “accidental” high yielding stocks. These are stocks that have declined along with the market, or with their segment, but on an individual basis have maintained strong fundamentals. The problem is that not all high yielding stocks are accidental high yielders. Many are high yielding because they are high risk. The key for each individual investor is to determine his or her own tolerance for risk and then do the required due diligence to find the right equities to meet their own individual objectives. Then based on your assessment of the market begin to deploy your funds accordingly, be it through dollar cost averaging, or some other strategy that you have chosen.

Whether you choose to pour through annual reports, 10K’s, quarterly financials, etc. or opt to review financial information from secondary sources such as Google Finance, Yahoo Finance, MSN Money, to name but a few of the larger ones, it is important that you understand the most fundamental facts about any company that you are considering as an investment. Essentially you should understand what it is that a company does well enough so that you can explain it to someone else. You should know what kind of an operation it is, its management style, pertinent facts about the company’s growth, profit, business cycle, risk factors, rating versus competition, etc. There are a number of metrics that are very helpful in rating a company versus its peers, and determining if a particular equity meets your own specific criteria. These data points and ratios are available at virtually every financial site which follows equities.

Revenue: Look at the trend. Where is the company in its growth cycle?

Earnings: Is the company making money? Is income growing or declining? What is the trend for the P/E (ratio of price to earnings)? How does the P/E ratio compare to competitors? What are the EPS (earnings per share)? How much of EPS are paid out in dividends? How much is available for R&D, growth, etc.? It is important to note that in some high yield tax advantaged companies such as Real Estate Investment Trusts, Master Limited Partnerships, and Business Development Companies, the rules governing their operations are quite different than with most corporations. Other metrics such as hedging, DCF (distributable cash flow), and interest rate trends may be as important to look at as income when one evaluates these entities. For details on these special tax advantaged companies any search engine will provide in depth information as to their structure and operations.

Ratio of Debt to Equity: In a healthy company when equity is divided into debt the results should normally be less than one. Comparison with peers is important in evaluating this metric.

Assets and Liabilities: While there is a wide range of healthy or unhealthy possibilities, as a rule of thumb you will want to see assets at least double liabilities. Dividing assets by liabilities results in the Current Ratio which should generally be at least 2.

Book Value Per Share: Determined by dividing the net value of a company by the shares outstanding, the Book Value Per Share is a metric that indicates how the general market views the success of that company. If shares sell above book it generally means that the market perceives future growth. Sometimes the market gets it wrong and a company sells below book providing a buying opportunity. Different categories tend to have different ratios of book value to share price so it is important to review other equities in the same field when evaluating Book Value Per Share.

Insider & Institutional Trading: Are insiders (corporate officers and others with inside information) buying or selling? Why? Do they know more than you do about the likely future for an equity?

How many times have you heard that what has happened in the past is no guarantee regarding what will happen in the future? Well, the fact of the matter is that generally, unless you have a crystal ball, past performance is probably the best place to look while determining what may happen in the future. This information is available to everyone, but relatively few take advantage. It is so much easier to simply buy or sell what your broker or financial adviser suggests, but do they really know your tolerance for risk, financial objectives, and investment parameters? Whose financial interests are they most concerned about, yours or theirs? Are they willing to take the time to develop a specific plan for you, or will they try to fit you into a preexisting “canned” plan that their company is marketing to folks like you?

Given the fact that there is no clear direction for the markets in 2012, doesn’t it make more sense than ever to take the time to truly evaluate your current portfolio, due the proper due diligence on stocks that you are considering for future purchase, and to then stay on top of things so that you can make the appropriate mid stream adjustments as circumstances change? Does anyone care more about your money than you do? Really? It’s not that hard!

Copyright 2012 Boyd Investment Holdings LLC, All Rights Reserved Worldwide

About Nirbhaya 23898 Articles
Nirbhaya has been interested in doing something on his own from the days when he was in college. But, things didn’t favour him in the beginning, and he had to work for others. Later, he finally started Onhike.com as a news portal, and then never looked back. The website is gaining popularity every day. He puts all of his skills into his work and making his dream come true. He covers Tech and General news on this website.