Buy Value, Not Momentum

Includes: SE, SEP
by: Roger S. Conrad

The momentum investing fad didn't die with the tech bubble in the 1990s or the credit bubble in the 2000s. Today, investors are even buying and selling dividend-paying stocks on momentum.

With bonds offering abysmal yields and savings accounts offering interest rates near zero, stocks are the only game in town for investment income. Fear of a reprise of the 2008 meltdown, however, runs strong. Uncertain credit markets and economic conditions continue to trigger dividend cuts and worse at companies that stumble.

As the aftermath of the 2008 debacle proved, stocks with solid underlying businesses will always recover from a crash. Rising dividends will also push a stock's price higher over time, rewarding investors who have the fortitude to ride out near-term ups and downs.

Of course, buying and holding is easier said than done in a volatile market. After the trauma of the financial crisis and market meltdown, even a single off day is enough to convince some investors that a company is in trouble.

In this environment, stocks that are in motion tend to stay in motion. That is, investors tend to pile into names that are appreciating in value because they assume these stocks entail less risk. The same principle applies on the downside: When a dividend-paying stock declines, investors assume that the risk of a payout cut has increased - a perception that engenders even more selling.

The stodgy dividend-paying stocks of yesteryear are suddenly volatile. Although this development can be unsettling, the market's inefficiencies give income investors ample opportunity to pick up high-quality names at a discount. By the same token, investors should also avoid paying too much for an overbought stock that will pull back at even the slightest disappointment.

At this stage in the rally, few worthwhile high-dividend paying stocks are in the bargain bin. One example is Spectra Energy Partners LP (NYSE: SEP), a master limited partnership (MLP) that owns pipelines and other midstream infrastructure. The firm has increased its distribution in all 17 quarters since its initial public offering in June 2007.

Management's initial guidance calls for cash available for distribution to increase by roughly 5 percent in 2012 - less than some analysts had expected. Two analysts downgraded the units following the earnings release; only two analysts rate the stock a buy, while nine rate it a hold and two rate it a sell.

But as we've seen time and time again during the MLP's relatively brief history, management sets its guidance very conservatively. Neither management's guidance nor nonplussed analysts' estimates factors in the potential for Spectra Energy (NY: SE), the firm's general partner, to drop down assets to this top MLP investment.

Disclosure: I am long SE.