Four Companies With Attractive Value, Growing Dividends and No Lost Decade

Risk-averseInvestors today are very nervous, and their confidence strained at best. Consequently, they are more focused on safety than they are on return. Money has been pouring into bonds and other fixed income vehicles at record rates. Unfortunately, interest rates are at all-time lows and fixed income offers little or no return. Investors, as they are coming to grips with this realization, are looking desperately for places to invest that are safe, yet offer decent returns.Many investors are turning to dividend paying blue-chip stocks. Generally, we believe this is a good long-term strategy for several reasons. First of all, many blue-chip companies are currently available at discounts to historical normal valuations. Therefore, current dividend yield is higher than normal, and in many cases equal to or greater than rates on quality bonds.Furthermore, many of these blue chips have long histories of increasing their dividends every year. In contrast to fixed income, this strategy offers investors a potential raise in pay each year along with some capital appreciation potential.When evaluating these opportunities regarding dividend paying stocks, we believe it is imperative for investors to be realistic with their evaluations. Investors need to understand the important principles behind risk/reward ratios.It is almost a universal truth that in order to generate higher returns you must also be willing to take more risk. But more risk does not necessarily mean high risk. In some cases, more risk may possibly only mean slightly more. Understanding that there are graduated levels of risk allows for more level-headed and reasoned investing decisions.The lost decadeMuch has been written and discussed regarding the so-called lost decade for equity returns. In our opinion, not enough has been written or discussed regarding the real cause of the lost decade. Volumes have been offered about bubbles and excesses of all assorted shapes and sizes. There is certainly some truth to be found with most of these reasons. However, our research indicates that overvaluation, built upon irrational exuberance was the greatest contributor to the lost decade.We've written in the past about the dangers of bringing emotions into the investment process. Investing needs to be done rationally with the emotional response kept in check. We believe that one of the best ways to accomplish this is by investing by the numbers. In other words, investors need to calculate the returns that expected cash flows represent, and then run those calculations to their logical conclusions. Years ago we developed our EDMP Inc. F.A.S.T. Graphs™ to facilitate the easy accomplishment of these necessary mathematical investment tasks.When evaluating either the stock market in general, or individual stocks specifically, the mathematically calculated returns underpinning each brings great clarity. Figure 1A below will look at the S&P 500 going back to calendar year 1998, or just a few years preceding the so-called lost decade for equities. We would like for the reader to focus on the level of excessive and increasing overvaluation that peaked in calendar year 2000.The orange line with white triangles in Figure 1A approximately represents the historical normal price earnings ratio of 15 for the S&P 500 (the actual PE for the orange line is 15.4). As the chart clearly depicts, the black price line was significantly above the orange value line in 1998 and continued higher before it finally peaked in calendar year 2000.Figure 1A S&P 14yr. EPS Growth Correlated to PriceFigure 1B below calculates the performance associated with Figure 1A. Due to excessive overvaluation, returns on the S&P 500 since 1998 have been extremely weak at 2.6%. If we had run this graph only since calendar year 2000, because of even worse overvaluation existing at that time, we would discover that $100,000 invested in the S&P 500 would actually shrink to just over $75,000 today. Ergo, the lost decade that everyone frets about so much. We started in 1998 for reasons that will become obvious later in this article. Take note of the red S&P 500 performance figures shown below at 1.0% without dividends and 2.6% with dividends, which are also repeated in the four company charts which follow.Figure 1B S&P 14yr. Historical Performance... Read more