Leif Peterson

The High Dividend Stock Investor's Collapsing Dollar Survival Guide, Part 3

Great series of articles - was exactly what I was looking for. Indeed, owning a heavy stake in KMP, MO, PM, KO, PG, JNJ, XOM over the last 10 years and reinvesting dividends would be "ka-chung" right now. With another 10-15 years of work, you would be in hog heaven. Reinvesting dividends is actually exponential growth right in front of your eyes -- however, the focus gets sidetracked on diversification, price hunting, market corrections, sector rotation, etc.

Have you seen the Fed's plan for the next 10 years? Bailing out the saving & loan (S&L) crisis is ok if happens once, but in the current new (raw) deal the paper printing (inflation) over the next 10 years is equivalent to bailing out 10-15 S&L crises. This is absurd and can only continue up to a breaking point - and it's not clear what is going break at the moment the snap occurs. Dividend capture is a sort of contrarian investor style, which is likely to be one of the more successful approaches over the next 10 years.

For the bad, how long can the economy take on 500-600k people losing their jobs each month? The unemployed aren't likely to be hired back next week after the stimulus kicks in, rather, it's more likely that an unobservable shock wave is going to hit the strip malls and movie theaters -- peak foreclosures on commercial real estate is projected to occur in 2011.

For the ugly, the perfect storm has already started. Looking back, after WWI the country needed an economic rebound but got the Great Depression. After Iraq and Afghanistan, the economy (a) is now on life-support, (b) has a housing sector that had no business running up, and (c) sees a forecast with 10 years of solid out of control money printing (inflation). MT (Arcelor Mittal) and X (US Steel) are going up in price right now; however, steel is projected to drop 20-40% over the next few years (so hold for dollar cost-averaging or get out). Warehouses are full with no buyers. Worse yet, there really isn't much money anywhere since it's all debt. In consideration of the above circumstances, and post-9/11-centric ideology on possibility theory instead of probability theory, what can happen will. Thus, it's possible that half of the equities you list cut their dividends. For international, you didn't list BHP or RIO, which are harvesting huge amounts of iron ore for China. You might also balance your portfolio with CHL (China Mobile), HNP (Huaneng power); and CEO (you did mention CNOOC). For power production, China is like the highly efficient French nuclear energy program on steroids and brings new nuclear plants on line quickly with good international safety standards.

You also seemed to be short on consumer goods (KO, TR) and pharmaceuticals (PG, JNJ, ABT, PFE - I would stay away from Merck since almost all of their new blockbuster drugs were not approvaed by the FDA). PM and Altria will be a good to own, and I know from my travels in Russia after the 1990 dissolution of the USSR (total devaluation of the Ruble literally overnight) that alcohol flourished in an economy whose currency went to near-zero. So DEO may be rewarding (HQ is London, so it's in non-USD currency).

I wouldn't get wrapped up in the dollar - new fiat currency of the world issue so much. Your point about exchanging dollars for another currency based on communism or the Middle East was right on the mark -- it's never going to happen. US Treasuries are being bought up by foreign central markets for one reason: there's no other country on Earth that will pay you back if it owes you money since the honor code is what keeps everything glued together. What we do have to be careful about is what Dick Smalley (Nobel Laureate) said that "money goes where the brains are" referring to the US brain drain and 90% of science and technology moving to Asia (Singapore, China) within the next 10 years. Many of the problems with the economy are due to the Fed not having e.g. a gold standard to keep everything in check. Without standards, deregulation causes governments to wage war, politicians make re-elections promises, and sectors that have no business growing (housing) grow like gangbusters. You can't tax so the only thing you can do is inflate the problem away by printing money.

The ~220 point "crash" in October 1929 was largely responsible for the Great Depression, but was only the beginning of a much worse 2-4 year correction. The current bull market may recede, with a larger and deeper correction on the horizon. Now that you're on the sidelines, the key is to slowly buy up equities that keep raising their dividend throughout the oncoming 10 year storm. By the time everything clears the compound interest from reinvested dividends will have kicked in so much that there'd be no reason to want anything else -- you'll also be invested in energy, pharmaceuticals, and consumer goods which are the 3 essential sectors proven to be worthy for lifetime wealth.