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Tuesday, August 10, 2010

Where to Stash Your Cash? Listen to Hersh Cohen: Buy Equities that "Just Make Sense!"

The other week, a WSJ headline caught our attention: BofA Cuts Some CD Rates. The lead points from the article:
  • Bank of America cut some rates on certificates of deposits this week, the latest in a round of cuts that will leave consumers and businesses with fewer options to stash their cash.
  • Bank of America Corp. cut some rates on certificates of deposits this week, the latest in a round of cuts that will leave consumers and businesses with fewer options to stash their cash.
  • The Charlotte, N.C., lender this week cut the average rate on its five-year CD by 0.50 percentage point, to 1.75% from 2.25%. Its four-year CD went from an average of 1.75% to 1.45%, and its three-year CD dropped to an average of 1.1% from 1.5%.
  • The recent moves are another reminder of how U.S. investors have fewer places to go for healthy returns. Two-year Treasury yields hit a record low Friday of 0.539% in intraday trading, and money-market rates have sunk to 0.75% nationally.
  • Other U.S. banks are expected to follow the nation's largest bank by assets and lower their long-term rates, as well.
Meanwhile, money keeps pouring into bond funds - why, when yields are so incredibly low??? From Liz Ann Sonder's presentation we shared last week, we have an illustration of the recent out-performance of bonds (bottom) relative to past "cycles" versus equities (top):

Related to the BofA news and in spite of the funds flow, we keep hearing a common refrain that goes something like this: "Bond yields are so low, there's nowhere to generate any sort of decent return on our savings." Or, another one: "How are America's retirees going to live off of 1-2% interest income?" Or, "My CDs are expiring, where shall I roll them over?"

The answer is surprisingly simple:
invest in high quality companies with solid balance sheets that (1) sell or provide products or services that people need to buy (think cleaning supplies, food, beverages, telco services, etc.) and (2) offer reasonable, growing streams of dividends. We previously shared this strategy and the importance of dividends in November of 2009 and November 2008 (pre-CS$ blog in latter case).

For excellent, recent commentary on "Where to find income" we highly recommend watching Hersh Cohen on Consuelo Mack WealthTrack - video below from 7/23/10:
  • "Great Investor" Hersh Cohen, Chief Investment Officer of ClearBridge Advisors and Forbes Honor Roll fund member eight times discusses the "greatest investment opportunity" he has seen in decades.

    Link to "The One Investment..." First rate companies with great balances sheets and attractive dividend yields

    Stock Symbol Dividend Yield a/o 7/21/10
    Abbot Labs (ABT) 3.5%
    AT&T (T) 6.7% (a/o 7/20)
    ExxonMobil (XOM) 2.9%
    Heinz (HNZ) 3.8%
    Home Depot (HD) 3.4%
    IBM (IBM) 1.8% (a/o 7/20)
    Intel (INTC) 2.8% (a/o 7/20)
    Johnson & Johnson (JNJ) 3.5%
    Kimberly-Clark Corporation (KMB) 4.0%
    McDonald's (MCD) 3.1%
    Microsoft (MSFT) 2.1%
    Procter & Gamble (PG) 3.0%
    The Traveler's Companies (TRV) 2.7%
    United Parcel Service (UPS) 3.1%
    Verizon (VZ) 7.2%
    Walmart (WMT) 2.3%
    3M Company (MMM) 2.5%

We love his comment that "they just make sense!" We agree: genuine common sense.... While we don't have direct exposure to these high quality companies, we have indirect through various large cap value funds in our retirement accounts. In our directly managed accounts, some of the dividend payers that we might similarly categorize include smaller cap companies Compañía Cervecerías Unidas S.A. (CCU), Lance Inc. (LNCE), NTELOS Holdings (NTLS), and PriceSmart (PSMT). One word of caution on these names is that, aside from NTELOS, recent runs leave valuations somewhat less attractive than earlier this year.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long CCU, LNCE, NTLS, PSMT.
© 2010 Jeffrey Walkenhorst
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