Chasing Yield

"More money has been lost reaching for yield than at the point of a gun"

I first came across this quote years ago in a piece written by Ray DeVoe. Ray was a wonderful writer whose financial newsletter was one of my favorites. I think about his quote whenever I hear someone tell me about a safe, secure investment with a huge yield or large promised return. I think about it because I know that if the yield or promised return sounds too good to be true, it is too good to be true. I have passed on this advice many times in my career, and it has usually proven accurate.

Unfortunately, I am hearing about these “great” investments way too often. It is not surprising, given the very low yields on bank deposits, money market funds, CD’s and high quality bonds. People are seeking higher and higher yields and their search will likely lead to disappointment.

Now, we are investors who seek out attractive yields on stocks that we buy. We are very comfortable with the academic research that shows that investing in dividend paying stocks, particularly ones that grow their dividends, has led to above market returns over time. But we are also aware that there is research that shows if you seek out the very highest yielding stocks, you are very likely to set yourself up for poor performance. Why is that? Because strong, well run companies do not have to offer extraordinary yields to attract investors. Low quality companies do, and while investing in them may pay off, the odds are not stacked in your favor.

When we pick investments for ourselves and our clients, we would prefer to have the odds in our favor. As we mentioned above, stocks that pay dividends, and grow, their yields tend to outperform the market. So. If we can find those dividend paying companies with solid businesses, good balance sheets, predictable cash flows and trustworthy management teams, we feel pretty good. If we can find those companies and patiently wait until they are selling at low valuations, than we are pretty confident that we will obtain attractive returns over time. We don’t feel the need to chase super high yields from stocks or bonds, because we recognize we are putting our capital at risk.

Some examples today of companies that meet our criteria include:

				PAYOUT
	PRICE	P/E	YIELD	RATIO	ROE
ABBOTT LABS	$44.94	12.2	3.6%	45%	29.7
GENERAL DYNAMICS CORP	$54.76	8.9	2.8%	23%	24.7
JOHNSON & JOHNSON	$59.25	13.1	3.3%	41%	30.4
KIMBERLY CLARK CORP	$54.38	13.2	4.4%	59%	35.5
NIKE INC	$53.19	15.0	1.9%	32%	21.5
PAYCHEX INC	$25.35	19.2	4.9%	84%	39.8
PROCTER & GAMBLE CO	$55.21	13.1	3.2%	45%	17.4
SYSCO CORPORATION	$22.90	13.2	4.2%	53%	32.5
UNITED TECHNOLOGIES CP	$53.97	13.2	2.9%	33%	27.7

Disclosure: As of this date the authors and clients of Harvest Financial Partners own ABT, GD, JNJ, KMB, NKE, PAYX, PG, SYY and UTX. Positions may change at any time. These are NOT recommendations. This blog is for informational purposes only.

Our 2nd Quarter Client Letter

Writing this letter is much more pleasant than some of our previous ones. If you just look at the indices, you would think that it has been an uneventful year so far, with the S&P 500 up 3% and the Dow up Jones down 2%. Of course the minor changes in the averages masks an incredibly volatile (and at times frightening) six months. We saw 2009 start with such promise after the painful declines of 2008. A new president was inaugurated with many bold ideas for change, but then the markets started spiraling downward. The bottom was on March 9th and the fear and anxiety levels were at levels that many have never before seen (and hopefully will never again see). The markets then began moving up and by June 12th we had reached our high for the year. The S&P 500 had moved a stunning 38% in 3 months.

Given the unease we saw in late February and early March, we have come a long, long way. But we still have a ways to go. The journey did not end for you on June 30th, and we are very cognizant of that fact. So, while we are pleased to see improvement in the markets and investor psychology, we know that there will continue to be many bumps along the way. We are still waiting to see if the stimulus leads to improvement in the economy, if some kind of health care reform is enacted, what type of financial and environmental regulations may be passed, what will happen to our taxes…There are many questions and few clear answers.

So what does this mean for you? It means that we will continue to focus on finding the best investments for your portfolio-whether they be reasonably valued equities, high quality fixed income instruments or mutual funds that are run by talented managers. We continue to feel this approach provides some level of consistency in very turbulent times. It should also allow us to avoid disasters, while also taking advantage of opportunities in the market. Because we have generally been maintaining high cash levels in our portfolios, it gives us liquidity to take advantage of opportunities that will present themselves in the market. Over the next month, many companies will be announcing earnings and unless managements are overly optimistic, we should find a bargain or two.

In regards to mutual funds, we have been making an effort to be more pro-active by setting up conference calls with the firm’s managing the funds. We use these calls in an effort to provide a high level of due diligence in these uncertain times. We have shared our thoughts on the Blog, which you can find in the Newsroom section of our website.

As always, we like to remind ourselves how lucky we are to have you as a client. We appreciate your trust and look forward to rewarding your confidence. Please let us know if there is anything that we can do to help you out during the summer. We also would be pleased to assist a friend or family member who may be in need of some financial advice or a fresh perspective on their investments. Feel free to pass on our names.

Fiscal Health Day

I read this article in the NY Times (subscription or registration may be required) this past weekend. It discusses the importance of taking a fiscal health day to ensure that your financial life is in order. Ron Lieber provides some very interesting issues to focus on during this day. We might add a few more areas to focus on:

1) Review your investment portfolio and ensure it is invested in a manner that will help in meeting your goals, but also make sure it provides sufficient reserves to protect you in these uncertain times.
2) Evaluate the quality of your fund, stock and bond holdings. Are they still investments that you are comfortable holding?
3) Determine what kind of debt you may have. Are there ways to reduce or eliminate the debt and strengthen your balance sheet or to lock in today’s relatively low rates?
4) Ask the phone company or cable company to review your current plan and determine if there are cheaper alternatives for you.
5) Review your 401k and make sure that it is still invested in a way you are comfortable with and see if there any way you can contribute, say, another 1% of your salary?

This may sound a little daunting, but if you spend a day making an effort to improve your fiscal health, you will likely find many ways to save money and provide a little extra piece of mind. We are certain it will be time well spent.

If you could use some help, just email Jim (jim@harvestfp.com) or John (john@harvestfp.com) and we would be happy to assist.