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 1st Quarter Client Letter

“May you live in interesting times.”
- Chinese proverb…and curse

As we complete our first year as Harvest Financial Partners we have thought about that proverb a lot. We have seen largest financial market and home price declines since the 1930s, government intervention in the economy on an unprecedented scale, and the demise or near demise of such financial behemoths as Fannie Mae, AIG, Citigroup, Bear Stearns and Lehman Brothers. Even GE has had to go hat-in-hand to Warren Buffett and use government debt guarantee programs to sell its bonds. Unemployment is fast approaching early 1980s levels, and world trade is declining for the first time in decades. Very interesting times!

A few weeks ago, when we last wrote you, the pessimism and anxiety were at an extreme. People were really nervous and scared. Today, the market is up over 1500 points, and all seems fine. We believe that the reality is somewhere in the middle. There are still many problems with the economy, but the unprecedented level of fiscal and monetary intervention should soon start to have an impact. This will not necessarily put an end to the recession, but it should improve the financial system and benefit other parts of the economy.

So where do we go from here? Well, we are not economic forecasters; rather we are analysts of companies. To our way of thinking, owning stock in a company at a price of $25/share has less risk than owning stock in the same company at $40/share, assuming the fundamentals have not markedly changed. We are finding many more of these “sales” in the market and, as investors that gets us very excited. We have talked often about the need to upgrade quality and focus on dividends, and we continue to believe that makes sense for investors. We have talked often about patience, and while it has been seriously tested, we still believe this is the correct course of action. So we will continue to proceed with your investment plan. We still are comfortable that this approach will yield you attractive returns over time.

To see how we are implementing our investment approach, we suggest you periodically visit our blog (there is a link on the website or you can visit it directly at www.plantingforyourfuture.blogspot.com). It contains our thoughts on the markets, investing and some of our favorite stocks.

In closing, another quote, “It was the best of times; it was the worst of times”. Even with the worst financial markets in decades we have loved every moment of building Harvest Financial Partners. Most importantly we have enjoyed getting to know you and the rest of our clients. Working with you is why we started the business and what keeps us energized every day. Of course, there are growing pains along the way, so if you have any suggestions or concerns, please let us know.