Why Your Safe Stocks May Be In Trouble

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Includes: PG
by: Zachary Scheidt

Summary

Dividend stocks are in demand, thanks to low interest rates. This demand has driven share prices higher and investors must now pay a premium for income.

At the same time, potential for growth is drying up. This creates risk for investors as share prices could quickly move back to "normal" valuations.

There are seasons for buying and seasons for selling. Now is a great time to trim successful dividend positions and invest the cash in opportunities at more reasonable levels.

Click to enlarge

(Source: Pixaby - creative commons)

The weather on Wall Street may look clear right now. But there is a storm brewing which could put your safe stocks in harm's way. If you've loaded up on "conservative" dividend-paying stocks, now may be the time to consider lightening up on some of these positions.

Why Safe Stocks are now Anything But Safe

In a normal market, dividend stocks are great for conservative investors who want stability and income. That's because companies that pay dividends are typically mature organizations with stable cash flows.

Normally, investing in stable companies involves less risk and more reliable returns.

But this isn't a normal market!

Thanks to the Fed's zero interest rate policy, it has become very difficult to generate reliable investment income. Bank deposits pay next to nothing, Treasury yields are miniscule, and investment grade corporate bonds don't get the job done.

Low rates have caused investors to abandon these "fixed income" opportunities in favor of safe stocks that pay dividends. Pension funds, endowments, and regular retail investors are buying these safe stocks hand over fist. It's the only way they can generate the income they need to survive!

If you've ever taken a basic economics class, you know about the law of supply and demand. When demand rises (as it has for safe stocks), the price naturally increases.

Today, investors are desperate to generate income, and they're willing to pay just about any price to "buy income." Take a look at the following chart from Sober Look to see the effect this demand has on stock values.

Click to enlarge

Ironically, investors are paying a premium price for these safe stocks at the worst time possible.

It's becoming more and more difficult for mature companies to find areas to grow their business. And yet, investors are paying for these companies as if future growth is all but guaranteed.

A Concerning Sign of the Times

Few companies exude "safety" like Procter & Gamble (NYSE:PG). This company has a stable business with consumer brands that are recognized internationally.

When investors think of safe stocks, they often think of PG. The company pays a dividend north of 3%. Over the last year, PG generated $65.3 billion in revenue. And shares of PG are up 8.5% this year alone.

But shares of PG are now trading at a premium price. Just take a look at the forward PE ratio below.

(Source: YCharts)

What's more, Procter & Gamble is giving us clues that future growth may be harder to come by.

A front Wall Street Journal article today reported that PG is cutting back on Facebook (NASDAQ:FB) ad spending. The company's party line is that it wants to steer away from the specific targeting Facebook ads offer. But total ad spending has been declining since 2013. So this is not just a Facebook issue. (Source:WSJ)

As a general rule, companies with growth opportunities spend heavily on advertising. This is how they boost revenue and build sales momentum.

On the other hand, companies without growth opportunities cut back on ad spending. It makes more strategic sense to reduce overhead costs and boost profits on existing revenue.

Time to Take Profits on Safe Stocks?

With safe dividend stocks trading at premium values, now is a good time to consider taking some profits off the table.

Let me be clear here. I still think dividend stocks have a place in your portfolio! In fact, I still recommend Procter & Gamble in my Lifetime Income Report newsletter.

But I do think you should consider lightening up on safe stocks that pay dividends. You don't want to see the value of your positions decline if these stocks trade lower.

Over the last few weeks, I've recommended taking partial profits from blue chip dividend stocks. If you've been holding positions like these for years, you've likely accumulated some great profits.

Here are some situations that might warrant selling shares of your "safe stocks":

Required minimum distributions: If you are over the age of 70, you may be required to withdraw capital from your retirement account. If this is the case, you'll likely need to sell some positions to raise cash. Selling your safe stocks at a premium price could be a very wise choice.

Rebalancing your portfolio: If you've been holding safe stocks in your account for quite some time, these positions have likely grown very large. Now would be a great time to sell some shares of these safe stocks at peak value. You could then use some of the capital to buy income opportunities at a more reasonable price.

Expenses or business opportunities: Many of you use the income from your investments to cover life expenses. Still others, have business opportunities you could invest in outside of the stock market. With safe stocks trading at such a premium, it makes sense to reduce your shares, and use the cash for expenses or to invest in your business.

A Time to Buy, And a Time to Sell

It's important to generate income from your investments. And blue chip dividend stocks can be great tools to help you collect income.

But there are different seasons in the market; seasons for buying, and seasons for selling.

Today, stocks that most investors consider "safe" are actually at risk. The risk is great enough to consider lightening up on these income-generating positions in favor of more stability and opportunities that aren't trading at such a premium.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.