3 Safe High-Yield Blue-Chip Bargains Retirees Will Love (2024)

(Source: Imgflip)

The rampant speculative frenzy in some of the most popular stocks continues with Tesla (TSLA) recently becoming the 9th most valuable company in American.

Tesla is worth more than Walmart, at least for now.

Walmart (WMT), which itself is 55% overvalued, is generating 29X the free cash flow of Tesla, which is worth far more than all other carmakers in the world...combined.

500,000 2020 production guidance
403K analyst consensus estimates 2020 deliveries
201 million global auto sales in 2020
0.2% global market share yet worth far more than all automakers with 99.8% of the global auto market

(Sources: F.A.S.T Graphs, FactSet Research)

(Source: Gurufocus)

TSLA's 37.5% CAGR long-term growth consensus from FactSet is amazing, I'm not denying that. But even if the company achieves that growth rate over the next five years, and then grows half as fast for the next five years after that, the company's margin of safety is close to -1400%.

(Source: Gurufocus)

Let's assume that TSLA grows at 37.5% CAGR for an entire decade, and then half as fast for the next decade after that. In that case, it's fair value is approximately $955, less than half the current price.

What would it take to justify TSLA's current price?

(Source: Gurufocus)

TSLA would have to sustain 37.5% CAGR growth for the next 12.5 years
and then grow at almost 20% CAGR for the next 12.5 years after that
TSLA would have to grow free cash flow 446 fold over the next 25 years
27.6% CAGR growth for a quarter-century
2045 Annual FCF would need to be $357 billion (almost as much as the current market cap)

For context, Apple is the most FCF rich company on earth, generating $71 billion in FCF in the past year. Tesla would need to generate 5X as much free cash flow, in a more capital intensive and lower margin industry, every single year by 2045.

And that's just to justify the current valuation, with a minimal 8% margin of safety.

But Tesla is hardly the only dangerous bubble prudent investors need to watch out for these days.

The 5 Most Dangerous Dividend Stocks In America

Most people think of volatility risk when they think about stocks. Warren Buffet, the greatest long-term investor thinks only of fundamental and valuation risk.

Volatility is not a measure of risk.... Risk comes from the nature of certain kinds of businesses.

It can be risky to be in some businesses just by the simple economics of the type of business you’re in, and it comes from not knowing what you’re doing. And if you understand the economics of the business in which you are engaged, and you know the people with whom you’re doing business, and you know the price you pay is sensible, you don’t run any real risk." - Warren Buffett (emphasis added)

The most dangerous dividend stocks, from a valuation and short-term volatility perspective are

MSCI (MSCI): 91% overvalued
Danaher Corp (DHR): 104% overvalued
Apple (AAPL): 152% overvalued
NVIDIA (NVDA): 197% overvalued
West Pharmaceutical Services (WST): 199% overvalued

Don't get me wrong, these are all wonderful companies and at modest discount to fair value, as close to "must own" dividend growth stocks as exist on Wall Street.

Just take a look at their impressive fundamentals to see why.

Fundamental Stats On These 5 Bubble Blue-Chips

Average quality score: 9.6/11 SWAN quality vs. 9.6 average dividend aristocrat
Average dividend safety score: 4.6/5 very safe vs. 4.5 average dividend aristocrat (about 2.5% dividend cut risk in this recession)
Average FCF payout ratio: 24% vs. 58% industry safety guideline
Average debt/capital: 47% vs. 40% industry safety guideline vs. 37% S&P 500
Average yield: 0.4% vs. 1.8% S&P 500 and 2.1% aristocrats
Average overvaluation: 148% vs. 42% overvalued S&P 500
Average dividend growth streak: 9.8 years vs. 41.8 aristocrats, 20+ Graham Standard of Excellence
Average five-year dividend growth rate: 22.4% CAGR vs. 8.3% CAGR average aristocrat
Average long-term analyst growth consensus: 12.4% CAGR vs. 6.4% CAGR S&P 500
Average forward P/E: 51.5 vs 20.8 historical vs. 23.3 S&P 500
Average earnings yield (Chuck Carnevale's "essence of valuation": 1.9% vs. 4.3% S&P 500
Average PEG ratio: 4.16 vs. 1.67 historical vs. 2.75 S&P 500
The average return on capital: 142% (90% Industry Percentile, High Quality/Wide Moat according to Joel Greenblatt)
Average 13-year median ROC: 215% (recession effects)
Average four-year ROC trend: +2% CAGR (relatively stable moat/quality)
Average S&P credit rating: A- vs. A- average aristocrat (7.5% 30-year bankruptcy risk)
Average annual volatility: 29.8% vs. 22.5% average aristocrat (and 26.3% average Master List company)
Average market cap: $527 billion mega-cap
Average four-year total return potential: 0.4% yield + 12.4% CAGR long-term growth -9.7% CAGR valuation boost = 3.1% CAGR (1% to 5% CAGR with an appropriate margin of error)
Average probability-weighted expected average four-year total return: 0% to 4% CAGR vs. 1% to 6% S&P 500
Average Mid-Range Probability-Weighted Expected 5-Year Total Return: 2.3% CAGR vs. 3.2% S&P 500 (26% less than S&P 500)

These are some of the greatest growth stocks on earth, as seen by their

dividend aristocrat matching quality and safety scores
average A- credit rating
returns on capital of 142%, in the top 10% of their industries

However, they are also volatile companies, with average annual volatility over the past 15 years of about 30% CAGR.

And they are about 150% overvalued meaning that investors buying these five companies today could expect about 2% CAGR total returns over the next half-decade.

Investment Decision Score: Some Of The Least Prudent Investments You Can Make Today

I never make a recommendation or buy a company until I've assessed how reasonable and prudent an idea it is relative to the S&P 500, most people's default alternative.

I consider valuation, as well as the three core principles that all successful long-term investors prioritize.

5 Bubble Blue-Chip's Investment Decision Score

Goal	5 Bubble Blue-Chips	Why	Score
Valuation	Potential Trim/Sell	148% overvalued	1/4
Preservation Of Capital	Excellent	A- stable credit rating, 2.5% long-term bankruptcy risk	7/7
Return Of Capital	NA	13-year median yield 0.7%, growth stock	NA
Return On Capital	Average	2.3% PWR vs 3.2% S&P 500	5/10
Relative Investment Score			62%
Letter Grade			D- very poor
S&P			73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

Even compared to the highly overvalued S&P 500 these bubble blue-chips make a very poor long-term investment right now.

They are priced for perfection, and then some.

Finding Quality & Value In This Market Bubble

To find wonderful blue-chips available at attractive valuations I began, as I always do with screening the 461 company Dividend Kings Master List by valuation.

Specifically, for potential good buys or better, which is based on an appropriate margin of safety given a companies quality and risk profile.

Dividend Kings Rating Scale

Quality Score	Meaning	Margin Of Safety Potentially Good Buy	Strong Buy	Very Strong Buy	Ultra-Value Buy
3	Terrible, Very High Long-Term Bankruptcy Risk	NA (avoid)	NA (avoid)	NA (avoid)	NA (avoid)
4	Very Poor	NA (avoid)	NA (avoid)	NA (avoid)	NA (avoid)
5	Poor	NA (avoid)	NA (avoid)	NA (avoid)	NA (avoid)
6	Below-Average, Fallen Angels (very speculative)	35%	45%	55%	65%
7	Average	25% to 30%	35% to 40%	45% to 50%	55% to 60%
8	Above-Average	20% to 25%	30% to 35%	40% to 45%	50% to 55%
9	Blue-Chip	15% to 20%	25% to 30%	35% to 40%	45% to 50%
10	SWAN (a higher caliber of Blue-Chip)	10% to 15%	20% to 25%	30% to 35%	40% to 45%
11	Super SWAN (as close to perfect companies as exist)	5% to 10%	15% to 20%	25% to 30%	35% to 40%

Next, I started the quality screen-based on above-average 8/11 quality companies, as well as 4/5 or 5/5 dividend safety scores.

Dividend safety is assessed based on up to 18 important safety metrics.

Dividend Kings Safety Model

1	Payout Ratio vs safe level for the industry (historical payout ratio vs dividend cut analysis by industry/sector)
2	Debt/EBITDA vs safe level for industry (credit rating agency standards)
3	Interest coverage ratio vs safe level for industry (credit rating agency standards)
4	Debt/Capital vs safe level for industry (credit rating agency standards)
5	Current Ratio (Total Current Assets/Total Current Liabilities)
6	Quick Ratio (Liquid Assets/current liabilities (to be paid within 12 months)
7	S&P credit rating & outlook
8	Fitch credit rating & outlook
9	Moody's credit rating & outlook
10	30-year bankruptcy risk
11	Implied credit rating (if not rated, based on average borrowing costs, debt metrics & advanced accounting metrics)
12	Average Interest Cost (cost of capital and verifies the credit rating)
13	Dividend Growth Streak (vs Ben Graham 20 years of uninterrupted dividends standard of quality)
14	Piotroski F-score (advanced accounting metric measuring short-term bankruptcy risk)
15	Altman Z-score (advanced accounting metric measuring long-term bankruptcy risk)
16	Beneish M-score (advanced accounting metric measuring accounting fraud risk)
17	Dividend Cut Risk In This Recession (based on blue-chip economist consensus)
18	Dividend Cut Risk in Normal Recession (based on historical S&P dividend cuts during non-crisis downturns)

The safety scores are based on a five-point scale, calibrated to estimate the dividend cut risk during a recession, with 3/5 average safety representing the S&P 500's dividend cut risk.

(Sources: Moon Capital Management, NBER, Multipl.com)

I use historical dividend cuts during recessions. I then scale them based on the severity of this recession, which blue-chip economists (16 most accurate out of 45 tracked by MarketWatch) expect to be 4X to 6X more severe than the average 1.4% annual decline since 1945.

Safety Score Out of 5	Approximate Dividend Cut Risk (Average Recession)	Approximate Dividend Cut Risk This Recession
1 (unsafe)	over 4%	over 24%
2 (below average)	over 2%	over 12%
3 (average)	2%	8% to 12%
4 (above-average)	1%	4% to 6%
5 (very safe)	0.5%	2% to 3%

Next, I screen for credit rating, which is created by rating agencies to assess the long-term default risk of corporate bonds based on

debt metric safety guidelines for each particular industry
guidelines are based on over 100 years of default data to estimate 30-year bond default risks
a company's individual balance sheet strengths and weaknesses, including cyclicality of the business model, stability of cash flow, liquidity, and management's current priorities in terms of capital allocation

(Source: S&P)

Credit ratings are a good proxy not just for long-term bond default risk but are also highly correlated to bankruptcy risk. A company that defaults on its bonds almost always winds up in Ch 11, wiping out common equity shareholders.

Credit Rating	30-Year Bankruptcy Probability
AAA	0.07%
AA+	0.29%
AA	0.51%
AA-	0.55%
A+	0.60%
A	0.66%
A-	2.5%
BBB+	5%
BBB	7.5%
BBB-	11%
BB+	14%
BB	17%
BB-	21%
B+	25%
B	37%
B-	45%
CCC+	52%
CCC	59%
CCC-	65%
CC	70%
C	80%
D	100%

(Sources: Dividend Kings Investment Decision Tool, S&P, University of St. Petersberg)

I screen out any company that doesn't have at least a BBB credit rating, which corresponds to 7.5% or less long-term bankruptcy risk. Effectively this means anyone buying these companies today has a single-digit or lower risk of losing all their money.

Finally, I consider dividend growth streaks, which are highly correlated with the risks of dividend cuts in this recession. Dependable income is a key priority for retirees, no matter the state of the economy.

(Source: Justin Law)

My fellow Dividend King Justin Law runs David Fish's CCC list and reports that of the 105 dividend stocks that cut or suspended dividends in the first half of the year streaks of 12+ years indicated a significantly lower risk of a cut during the worst economic downturn in 75 years.

After running these valuation and quality screens we end up with 24 companies, which I've sorted by yield.

(Sources: Dividend Kings Company Screening Tool)

From these 24 companies, I selected undervalued blue-chips that I haven't covered recently, and which offer today's retirees

very generous and dependable income
high margins of safety
modest to attractive long-term growth prospects
market-beating 5-year probability-weighted expected returns

3 Amazing Blue-Chip Deals Retirees Will Love

Enbridge (ENB): 11/11 quality Super SWAN with a 24-year dividend growth streak
(T): 8/11 above-average quality dividend aristocrat with a 36-year dividend growth streak
Prudential Financial (PRU): 9/11 quality blue-chip with a 12-year dividend growth streak analysts expect to hit 14 years by the end of 2022.

These three companies are each in a different sector and have strong fundamentals, as well as attractive valuations & total return profiles.

Fundamental Stats On These 3 High-Yield Bargain Blue-Chips

Average quality score: 9.3/11 Blue-Chip quality vs. 9.6 average dividend aristocrat
Average dividend safety score: 4.7/5 very safe vs. 4.5 average dividend aristocrat (about 2.5% dividend cut risk in this recession)
Average FCF payout ratio: 59% vs. 68% industry safety guideline
Average debt/capital: 38% vs. 47% industry safety guideline vs. 37% S&P 500
Average yield: 7.0% vs. 1.8% S&P 500 and 2.1% aristocrats
Average Discount To Fair Value: 25% vs. 42% overvalued S&P 500
Average dividend growth streak: 24.0 years vs. 41.8 aristocrats vs. 20+ Graham Standard of Excellence
Average five-year dividend growth rate: 10.3% CAGR vs. 8.3% CAGR average aristocrat
Average long-term analyst growth consensus: 5.5% CAGR vs. 6.4% CAGR S&P 500
Average forward P/E: 8.3 vs 11.1 historical vs. 23.3 S&P 500
Average earnings yield (Chuck Carnevale's "essence of valuation": 12.0% vs. 4.3% S&P 500
Average PEG ratio: 3.52 vs. 4.69 historical vs. 2.75 S&P 500
Average Credit Rating: BBB+ vs A- dividend aristocrats
Average annual volatility: 28.3% vs. 22.5% average aristocrat (and 26.3% average Master List company)
Average market cap: $102 billion mega-cap
Average four-year total return potential: 7.0% yield + 5.5% CAGR long-term growth + 5.9% CAGR valuation boost = 18.4% CAGR (9% to 28% CAGR with an appropriate margin of error)
Average probability-weighted expected average four-year total return: 5% to 23% CAGR vs. 1% to 6% S&P 500
Average Mid-Range Probability-Weighted Expected 5-Year Total Return: 13.8% CAGR vs. 3.3% S&P 500 (318% more than S&P 500)

Retirees will love that these three blue-chips offer

a very safe 7.0% average yield = almost 4X that of the S&P 500
a long-term growth consensus average of 5.5%, 2X to 3X the expected long-term rate of inflation
24-year average dividend growth streak = dependable income in all economic and market conditions
a strong BBB+ stable average credit rating
long-term probability-weighted expected returns of almost 14% CAGR, more than quadruple that of the highly overvalued S&P 500

Investment Decision Score On These 3 High-Yield Blue-Chip Bargains

Goal	3 High-Yield Blue-Chip Bargains	Why	Score
Valuation	Potentially Strong Buy	25% undervalued	4/4
Preservation Of Capital	Above-Average	BBB+ stable outlook credit rating, 5% long-term bankruptcy risk	6/7
Return Of Capital	Exceptional	40.4% of capital returned over the next 5 year via dividends vs 10.4% S&P 500	10/10
Return On Capital	Exceptional	13.8% PWR vs 3.3% S&P 500	10/10
Relative Investment Score			97%
Letter Grade			A+ exceptional
S&P			73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

Now I know what many of you are thinking. "How can you recommend three companies that have delivered such weak returns over the past five years?"

3 High-Yield Blue-Chip Bargains Since 2015 (Annual Rebalancing)

(Source: Portfolio Visualizer)

These three companies have delivered slightly negative total returns over the past five years. But it's precisely because they have grown their earnings, dividends and cash flows while their prices have fallen (multi-year bear markets) that they represent sone of the best high-yield opportunities on Wall Street today.

Five years is NOT a statistically significant time period that we can use to judge the quality of a company. Remember that it takes 10+ years for fundamentals (quality) to determine 90% to 91% of returns.

(Source: Imgflip)

That's confirmed by

JPMorgan Asset Management
Bank of America
RIA
Princeton
Warren Buffett

Time Frame (Years)	Total Returns Explained By Fundamentals/Valuations
1 Day	0.05%
1 Month	0.9%
3 Months	2%
6 Months	4%
1	8%
2	18%
3	27%
4	36%
5	45%
6	54%
7	63%
8	72%
9	81%
10+	90% to 91%

Risks Assessment & Constructing A SWAN Retirement Portfolio With These Three High-Yield Blue-Chips

Deeper Look Videos On These 3 High-Yield Blue-Chip Bargains

Here are deeper looks at each of these three high-yield blue-chip bargains.

Enbridge: One Of The Safest 7.3% Yields On Wall Street (Doesn't Use A K-1 Tax Form)

9% Yielding Enbridge Is A Super SWAN With A Dividend You Can Trust In This Recession

Enbridge is the largest pipeline operator on earth and has the second safest dividend in the industry behind fellow 11/11 Super SWAN (EPD).

ENB Fundamentals

quality score: 11/11 Super SWAN
safety score: 5/5 very safe (2% to 3% dividend cut risk in this recession, 0.5% risk in a normal recession), stable outlook
Max portfolio risk cap recommendation: 5% or less
yield: 7.3%
current price: $32.81
Potential good buy price: $40
2020 average historical fair value: $42 ($39 to $46 range, Morningstar estimate $43, uncertainty "medium", which I agree with given the fair value range )
approximate discount to fair value: 22%
DK rating: potentially strong buy
historical fair value: 10 to 11 OCF
current blended P/OCF: 8.8
Cash flow yield (Chuck's "essence of valuation"): 11.3% vs 6.7% recommended
Growth price into stock: about 0.2% CAGR according to Graham/Dodd fair value formula
Growth priced into the stock: about 5.1% based on historical PEG
long-term growth consensus: 5.5% CAGR
the margin of error adjusted analyst long-term consensus growth forecast: 1% to 8% CAGR
5-year total return potential: 10% to 15% CAGR (analyst consensus 12.4% CAGR)
PEG ratio: 1.55 vs 1.72 historical vs 2.74 S&P 500 vs 2.35 historical S&P 500
Investment Decision Score: 97% = A excellent

ENB Investment Decision Score

Goal	ENB	Why	Score
Valuation	Potentially Strong Buy	22% undervalued	4.00
Preservation Of Capital	Above-Average	BBB+ stable outlook credit rating, 5% long-term bankruptcy risk	6.00
Return Of Capital	Exceptional	42.1% of capital returned over the next 5 year via dividends vs 10.4% S&P 500	10.00
Return On Capital	Exceptional	9.4% PWR vs 3.3% S&P 500	10.00
Relative Investment Score			97%
Letter Grade			A excellent
S&P			73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

ENB may not be the bargain it was back in March (which is true of all stocks) but it remains one of the most attractively valued high-yield blue-chips retirees can buy today.

Analysts expect a 5% dividend hike to be announced for Q4, and then a 6% dividend increase in 2022. It now has the fastest growth consensus forecast from analysts of any safe midstream operator.

The US dollar is expected to weaken modestly vs the Canadian dollar in the coming years, further boosting US investor's dividend income.

AT&T: The Highest Yielding Dividend Aristocrat You Can Buy Today

AT&T isn't an exciting stock, nor is it a particularly fast-growing company. In terms of management quality/dividend friendly corporate culture, it's average, scoring a 2/3 on my quality scale, primarily due to the 36-year dividend growth streak analysts expect to hit 37 years in two quarters.

AT&T Fundamentals

quality score: 8/11 above-average
safety score: 4/5 above-average (4% to 6% dividend cut risk in this recession, 1% risk in a normal recession), stable outlook
Max portfolio risk cap recommendation: 7% or less
yield: 7.0%
current price: $29.69
Potential good buy price: $29
2020 average historical fair value: $37 ($32 to $42 range, Morningstar estimate $37, uncertainty "medium", which I agree with given the fair value range )
approximate discount to fair value: 19%
DK rating: potentially reasonable buy
historical fair value: 13 to 14 PE
current blended PE 8.9
Earnings yield (Chuck's "essence of valuation"): 11.2% vs 6.7% recommended
Growth price into stock: about 0.2% CAGR according to Graham/Dodd fair value formula
Growth priced into the stock: about 2.6% based on historical PEG
long-term growth consensus: 1.1% CAGR
the margin of error adjusted analyst long-term consensus growth forecast: 0% to 9% CAGR
5-year total return potential: 7% to 19% CAGR (analyst consensus 11.3% CAGR)
PEG ratio: 8.43 vs 3.42 historical vs 2.74 S&P 500 vs 2.35 historical S&P 500
Investment Decision Score: 90% = A- very good

AT&T Investment Decision Score

Goal	AT&T	Why	Score
Valuation	Potentially reasonable buy	19% undervalued	3/4
Preservation Of Capital	Above-Average	BBB stable outlook credit rating, 7.5% long-term bankruptcy risk	5/7
Return Of Capital	Exceptional	36.0% of capital returned over the next 5 year via dividends vs 10.4% S&P 500	10/10
Return On Capital	Exceptional	11.3% PWR vs 3.3% S&P 500	10/10
Relative Investment Score			90%
Letter Grade			A- very good
S&P			73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

If AT&T achieves the safe leverage levels of 3.5 or less debt/EBITDA and 4+ interest coverage it would get upgraded to 5/5 safety and 9/11 quality blue-chip, allowing it to make the DK Phoenix watchlist.

Assuming its price and yield remained similar to today's' that would cause us to start building a core position in the highest yielding dividend aristocrat.

Analysts expect leverage to fall within those safe parameters in 2021 or 2022.

Prudential Financial: A Classic Buffett "Fat Pitch" Investment

(Sources: imgflip)

Prudential Financial: Own A Piece Of This 'Blue-Chip' Rock That Yields 7%

Prudential Financial is one of my highest conviction high-yield blue-chip recommendations right now. It represents a classic Buffett style "fat pitch" which is why DK Phoenix has bought it five times now and has a limit order in place to buy it again at a yield of 6.5%.

PRU Fundamentals

quality score: 9/11 Blue-Chip
safety score: 5/5 very safe (2% to 3% dividend cut risk in this recession, 0.5% risk in a normal recession), stable outlook
Max portfolio risk cap recommendation: 7% or less
yield: 6.5%
current price: $67.41
Potential good buy price: $87
2020 average historical fair value: $103 ($87 to $120 range, Morningstar estimate $78, uncertainty "high", Morningstar fair value based on adjusted book value of 0.8 vs 0.94 historical)
approximate discount to fair value: 34%
DK rating: potentially strong buy
historical fair value: 9 to 9.5
current blended PE: 6.7
Earnings yield (Chuck's "essence of valuation"): 15.0% vs 6.7% recommended
Growth price into stock: about -0.9% CAGR according to Graham/Dodd fair value formula
Growth priced into the stock: about 4.4% based on historical PEG
long-term growth consensus: 9.0% CAGR
the margin of error adjusted analyst long-term consensus growth forecast: 6% to 11% CAGR
5-year total return potential: 18% to 23% CAGR (analyst consensus 20.4% CAGR)
PEG ratio: 0.81 vs 1.56 historical vs 2.73 S&P 500 vs 2.35 historical S&P 500
Investment Decision Score: 100% = A+ exceptional

Prudential Financial Investment Decision Score

Goal	PRU	Why	Score
Valuation	Potentially Strong Buy	34% undervalued	4/4
Preservation Of Capital	Excellent	A stable outlook credit rating, 0.66% long-term bankruptcy risk	7/7
Return Of Capital	Exceptional	41.3% of capital returned over the next 5 year via dividends vs 10.4% S&P 500	10/10
Return On Capital	Exceptional	15.3% PWR vs 3.2% S&P 500	10/10
*Relative Investment Score*			*100%*
Letter Grade			A+ exceptional
S&P			73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

Prudential's high historical volatility may scare some investors, but not us.

(Source: Imgflip)

It's precisely when the market is most bearish on a quality blue-chip like PRU, that you can lock in the highest very safe yields and truly exceptional long-term probability-weighted expected returns.

Today's PRU buyer can likely look forward to sensational 10% yield on cost in five years, as well as 15.5% CAGR expected returns that will almost certainly crush the S&P 500.

Most importantly, the safe and growing income stream and strong returns PRU is likely to deliver are what prosperous retirements are made of.

Bottom Line: Prudent Income Investors Ignore Speculative Bubbles and Focus On Prudent Long-Term Investments In All Market & Economic Environments

Right now low-interest rates potentially justify much higher valuations for stocks in the short-term.

5-year average equity risk premium (S&P 500 earnings yield - 10-year Treasury yield): 3.8% according to UBS
20-year average equity risk premium 3.7% according to Goldman Sachs
current equity risk premium: 3.7%

BUT while that may be good news for momentum traders looking to score a quick profit, long-term income investors shouldn't speculate about the short-term.

The blue-chip economist consensus is for 2% to 2.6% average 10-year yields following an economic recovery.
most analyst firms and economists expect the S&P 500's long-term average PE to return to 16 to 17.5, the modern era historically normal range

In other words, analysts agree that today stocks might remain at very high valuations...but in the future, multiple compression is going to weigh on long-term returns.

Could the S&P 500 hit 4,000 or even 4,500 in 2020 and 2021 respectively? Theoretically yes.

Could Tesla keep rocketing higher if inclusion in the S&P 500 causes over $30 billion in index fund money to pour into it? Yes.

Could red hot momentum tech names like Apple and NVIDIA keep seeing their PE ratios rise to even more outlandish and dangerous levels? Absolutely.

Could bond yields potentially fall to zero or close to it, during this recession, allowing market multiples to approach the tech bubble peak of 27? That's a plausible scenario.

Could the S&P 500 set a new record for overvaluation, by achieving a 28, 29, or even 30X PE multiple in the next year or two? Crazier things have happened on Wall Street in the past decades, and even in 2020.

Does any of this mean that prudent long-term income investors, including retirees, should throw caution and sound risk management to the wind and start recklessly gambling? Heck no!

Gamblers and speculators care about the short-term. You may think I hate momentum traders and speculators. I do not.

They have a perfectly valid strategy that is 100% different than my own.

Their time frames are much shorter than mine and their strategies are completely different than mine.

While we share the same goals, strong returns over time, the approach we use are mirror opposites.

The speculators and gamblers who send prices swinging wildly, both in value and growth stocks, are ultimately my allies.

Enbridge, AT&T, and Prudential could not represent high-yield blue-chip bargains today if the market were perfectly efficient in the short-term.

(Source: Imgflip)

Thanks to irrational levels of pessimism about those blue-chips, and the market's short-term interest rate/growth obsession, prudent conservative income investors can lock in an average very safe 7.0% yield and nearly 14% CAGR probability-weighted expected returns with these three companies.

It's because the traders and speculators love Tesla at 229X earnings that you can safely buy Prudential at 6.6X earnings.

It's because traders love Apple at 37X earnings that you can buy ENB at single-digit cash flow multiples.

It's because traders love NVIDIA at 67X earnings that you can buy AT&T at a PE ratio of under nine.

During Tech Bubble Value Underperformed Growth Due To The Speculative Mania

(Source: Ycharts)

Long-Term Prudent Value Investors Were Vindicated

(Source: Ycharts)

Over the truly long-term, meaning 10+ years, fundamentals and valuations are 10X as powerful as sentiment, momentum, and luck.

I can't time the market worth a darn, so I don't even try.

I merely use the most powerful income and wealth compounding strategy ever discovered, which is to

buy quality companies
run by trustworthy and competent management
in a diversified and prudently risk-managed portfolio
at reasonable to attractive valuations
collect my safe and exponentially growing dividends while management works hard so one day I don't have to

(Source: AZ quotes)

Anyone buying TSLA, AAPL, or any bubble stock today, must pray for luck, specifically that they will lock in profits before the bubbles burst.

Prudent long-term investors don't need to pray for luck, they make their own.

Is the stock market a casino? Absolutely it is.

in the short-term anything can happen
in the long-term probability, statistics, and math guarantee the house always wins

A properly constructed SWAN retirement portfolio is like a casino. As long as your risk management can prevent you from ever becoming a forced seller, achieving your long-term financial goals is as close to a guarantee as exists in finance.

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Dividend Kings helps you determine the best safe dividend stocks to buy via our Valuation Tool, Research Terminal & Phoenix Watchlist.

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Access to our five model portfolios
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Our "Learn How To Invest Better" Library
Access to numerous valuable investing tools

Click here for a two-week free trial so we can help you achieve your financial goals while sleeping well at night in all market & economic conditions.