What to Buy When the Market is Overvalued

There are a few stocks, based on the value window that I’ve given you in the past, that meet the criteria of a good investment that pays a dividend right now. Very few. 8 in fact.  Of which, I already own enough of all 8 that I don’t want more.  If you followed along and sold some of your investments from 2008 and 2009 at a rather healthy profit, you’re sitting with cash on the sidelines much like me, or Berkshire Hathaway, although we’re all about $40B behind them.

So what do you buy?

Corporate bonds might work, if they presented both the right value and risk.  I have no problem with ” low As (aa-) into the high Bs for risk tolerance on corporate bonds.  A few opportunities come by now and then.  I will offer some of them as I find them.  Still, they represent an exposure level that is not as reliable as I would like, so I don’t dabble more than where a higher risk tolerance allows me to buy in.  Never, never, never buy a bond over face value (100) though.  The returns are never that good that you can’t find something similar that’s even slightly under face with a little patience that has the same yield, and less exposure to loss.  Buy a little good senior debt when you can find it.  Remember that it’s taxable, so the yields need to account for the tax that you’re going to pay.

I have not been as wild about most municipal bonds as the public sector is being hit hardest by the revenue drought, and even though the default rate hasn’t climbed to anything alarming yet, there were all kinds of “letters of credit” issued to municipalities in 2008 and 2009 that are coming due that will put a monkey wrench in the muni bond system. Wait until after that fall out to pick up the pieces, but don’t get caught in the fallout.  I’ve bought a couple here and there that spiked into the 5-6% range in places where the economy is not as bad as the bond raters are hitting the bonds with lower ratings. Overall though, I don’t think that the whole muni market is a deal, and one should tread carefully with the advice of a trader more familiar with the deals of the day.

The best thing, though, is to buy oil and minerals WITHOUT going to the commodities market. Commodities are too volatile, and even though they swear up and down that there isn’t collusive action, the lemming effect in commodities trading alone makes up for collusion as they all run around the board with each other, and often over the financial cliffs, in ways that mystify.

The best commodities play still remains a handful of oil and natural resources trusts. Sometimes they are just a person, or a small group of people, who bean-count X number of barrels of oil, or mineral mining or gathering rights for a particular area, and then pay out a dividend to the investors.  That dividend, of course dependent on the current price, runs around 5.75% to 12%.  That is far better than you’re going to get from a bank or CD, and it is vested in the only absolutely rock-solid commodities – oil and necessary minerals, coal, and basic building materials.

You are participating in the oil or mineral, without significant risk, other than perhaps the area suddenly going dry or the cost of mineral acquisitions skyrocketing and leasing of those rights falling off in value.  Most trusts that are based on long-running proven reserves can go more than a decade.  This is a short-term investment, that is really there to park your money in a high-yield, lower-risk investment that is easily liquidated, much more so than a bond.

Also, when there are corrections that wring some of the value of the DOW down a 1000 points or more, as happens from time to time, these investments tend to go up in value as investors seeking the same life raft you jumped on early now want to pay you a premium.

Usually by that time, after they’ve bailed out of a number of stocks and bonds, more value opportunities open up for you.  So while they’re climbing aboard your life raft, the seat at which you’re selling at a premium that increases your return to maybe 30-35%, you are jumping into the icy waters and scooping up the dead and dying that they’ve dumped as they head for a warm, safe, dry place in the market.

Take the money out of these stocks as opportunities to be deflated value stocks pop up.

I typically look for companies which have a return on equity and assets of greater than 15% a year, and put out a dividend yield of 6% of greater, a cash flow greater than zero every year, and, as I use Morningstar’s filters a financial health grade of B or better and a profitability grade of C or better.

That will generally only return a handful of stocks, perhaps 5-10, all with high dividend yields, from a diverse range of sectors.  Great Northern Iron Ore (GNI) is a good pick anywhere from 99 to 120.00, with yields around 10-13%. Marine Petroleum Trust (MARPS) yields around 6.5% on a 21.50 share price.  Tidelands Royalty Trust (TIRTZ) has a yield around 9.27% at $15.90.  Getty Realty (GTY) is a real estate investment trust (REIT) that leases out gas stations and distribution terminals. At a 6.7% dividend and an A rating for Financial Health by Morningstar, it is not a bad way to cash in on oil cash flow.

Some apparel retailers and licenseors make a good buck too: Cherokee Inc licenses its name to clothing largely carried by Target. It has an 4.85% dividend. La Chateau Inc A (LCUAF) is a retailer in Canada with stores in the Middle East and NYC that yields 6.17% on an $11.39 share price.

So there are places to grow your money even when the general market is fat and ready to pop.  Surely there are speedier places, but if you don’t want to make investing an hourly or daily affair, then you can put some stock in stocks that pay high dividends on stable business models.


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