How To Invest When The Market Is At All Time Highs

by: Dividend Growth Investor

With the market near all-time highs, many quality income stocks are getting close to being in overvalued territory. As a result, many investors are tempted to postpone new purchases until there is a correction. While many household names like Coca-Cola (NYSE:KO) are fully valued at the moment, there are many companies which are trading at attractive valuations. These of course are not the rock bottom valuations we saw in late 2008 and early 2009, but nevertheless could represent cheap entry points for enterprising dividend investors.

In general, dividend investors always need to be selective, and on the lookout for common stocks that are attractively priced. Entry price does matter, because overpaying for stocks could lead to subpar returns in the first five to ten years of the investment. For example, investors who purchased Coca-Cola or Wal-Mart (NYSE:WMT) in early 2000 didn't register much in terms of price returns for at least a decade. The only return during the period was in the form of dividends. On the other hand, having a large cash position that sits idle for over a year does not contribute to the financial goals of the would-be retiree. By sitting in cash, investors are missing out on the long-term compounding of stocks.

Back in 2000, the US markets as a whole were very overvalued. It was difficult to find quality income stocks to buy. However, there were still many pockets of opportunity for selective dividend investors. Many REITs were offering compelling valuations, and so were some financial companies like Bank of America (NYSE:BAC) for example. Many tobacco companies such as Phillip Morris, were severely beaten down because of the bad press tobacco was getting. Of course the Phillip Morris of 1999 is now Altria (NYSE:MO), Phillip Morris International (NYSE:PM), Kraft Foods (KRFT) and Mondelez International (NASDAQ:MDLZ) after all the splits. This is as an example that there are always pockets of opportunity for the trained eye, even in a market that is pushing new highs every single day.

There are plenty of pockets of opportunity in the current market environment as well. I spent a few minutes going through the dividend champions list using my entry criteria. I came up with the following quick list of cheap but promising dividend stocks:

Symbol Name Price Years Div Increase P/E Dividend Payout Ratio 10 yr Dividend Growth Yield DGI Portfolio
(NYSE:MCD) McDonald's Corp. 99.27 36 18.52 57% 28.43% 3.10% Yes
(NYSE:AFL) AFLAC Inc. 51.85 30 8.49 23% 19.27% 2.70% Yes
Wal-Mart Stores Inc. 74.28 39 14.8 37% 18.10% 2.53% Yes
(NASDAQ:WEYS) Weyco Group Inc. 24.18 31 13.98 39% 14.75% 2.81% No
(NYSE:APD) Air Products & Chem. 87.52 31 15.67 46% 11.79% 3.20% Yes
(NYSE:PG) Procter & Gamble Co. 77.27 56 17.54 51% 10.84% 2.91% Yes
(NYSE:CVX) Chevron Corp. 121.18 25 9.1 27% 9.63% 2.97% Yes
(NYSE:XOM) ExxonMobil Corp. 89.29 30 9.21 24% 9.01% 2.55% No
(OTCQX:EFSI) Eagle Financial Services 22.4 26 11.43 37% 8.60% 3.21% No
(NASDAQ:SRCE) 1st Source Corp. 24 25 11.9 34% 7.27% 2.83% No
(NASDAQ:CTBI) Community Trust Banc. 34.27 32 11.86 44% 7.03% 3.68% No
(NYSE:UGI) UGI Corp. 37.6 25 19.84 57% 6.94% 2.87% No
(NYSE:GPC) Genuine Parts Co. 77.4 57 18.7 52% 5.30% 2.78% No
(NYSE:ABM) ABM Industries Inc. 21.94 46 18.66 51% 4.88% 2.73% No

The companies above are not automatic buys, but merely ideas for further research. Investors should focus on building a portfolio of quality income stocks patiently, by allocating funds every month. One should layer their dividend portfolio brick by brick, which would bring solid foundation for long term results.

I plan on adding to my positions in the companies I own above over the next few months. I particularly like Air Products & Chemicals, Wal-Mart Stores, Aflac and Chevron at current levels, due to their low valuations and attractive entry yields.

This exercise should show investors that there are attractively valued income stocks even while markets are trading at all time highs, and most of the usual suspects like Coca-Cola, for example, are fully valued. By maintaining an open mind, and having the willingness to perform an independent search for companies for further research, an investor should be able to capitalize on attractive opportunities throughout all market cycles.

Disclosure: I am long KO, WMT, APD, AFL, CVX, MCD, PG. 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.

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