Rational Investing: Ongoing pessimism reminiscent of 1992 recession

Clark Davis is a 34-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.

Are surveys worth anything?

A February survey of corporate managers revealed that more than 95 percent believed that the recession was not over and 60 percent thought it would not end by mid-year.

That particular survey was conducted in February 1992. Interestingly (and with the 20/20 clarity hindsight provides) we know that the recession had actually ended almost a year earlier and the growth for that year reached 4 percent.

With individuals liquidating equity funds in January and pouring large dollar amounts into bond funds, the evidence is mounting that the level of pessimism prevalent in early '92 is attacking the logic circuits of a lot of current investors.

Sounds like the flip side; those same investors were chasing the tech issues and pooh-poohing bonds a few years ago. Columnists in most of the general circulation financial magazines wrote about bonds being unexciting growth was the buzzword. Stodgy companies with no growth potential paid dividends; it was much better for companies to use their funds for acquisitions or stock buybacks.

Over the years, many investors seem to have become so enamored with growth in earnings that they have either forgotten or ignored an investment axiom that "any asset that increases an owner's income regularly will appreciate in value over time." That's true of real estate, mineral properties, timberland, closely held business, you name it.

The same cannot be said of assets that provide a set level of income, such as certificates of deposit or corporate bonds. The latter can offer profit opportunities for those who choose to acquire and dispose of them on the basis of interest rate trends, but held to maturity they simply return to the owner the amount he invested.

So, what about dividends? Does it make sense to buy dividend-paying stocks now in anticipation of the president getting his request for the elimination of double taxation? Or should investors wait for the proposal to get through Congress?

Don't wait. By the time the tax legislation works its way through Congress, the elimination of double taxation is likely to be altered as the art of compromise is exercised to accommodate the disgruntled congressional minority who claim that it is going to favor the rich. (Taxing the same money twice is both unfair and illogical. As for economic stimulus, eliminating the taxation at the corporate level would be more effective, providing companies additional cash with which to expand plants and equipment and add jobs. With the pseudo egalitarianism-at-any-cost mindset of the liberals, there is no way that is going to happen.)

Do your search now for companies that have strong balance sheets, positive cash flow and a dedication to both paying dividends and raising them on a regular basis for at least the past 10 years.

If you want to narrow the list, look for an average annual dividend increase that was greater than the inflation rate and a percentage of earnings paid out in dividends that is less than 60 percent.

Time spent running your screens on any number of Internet financial sites and consulting Value Line will result in a list larger than you might imagine. For example, there are at least 160 stocks listed on the New York Stock Exchange that have increased their dividends every year for the past 10 years. Don't expect all of them to be recognizable names, but don't dismiss those that aren't. For years Wall Street analysts have focused on a limited number of big names, often to the exclusion of good companies

You will not find any high-tech names on the list; therefore, you will see that although many of the companies' stock prices have declined recently, that loss of value is substantially less than that of the high-tech, nondividend-paying companies. Relative performance would be better and you would be receiving dividend payments while waiting for the fog of geopolitical and other worries to lift from the markets.

Do not take the comments made in the beginning of this column to mean that bonds should be eliminated from portfolios. Unless you are a very aggressive investor, a portion of your portfolio should be in bonds, the quality and maturities determined by your time frame and risk tolerance.

Additionally, we recommend selling long maturity issues and allocating a portion of the proceeds to high yield bonds and bonds with maturities of less than seven years. Ask your financial professional for help. High-yield bonds are very attractive now, but employing them in a portfolio requires a level of knowledge and skill that most investors do not have.