Advertisement
investing

Beware the Roaring Twenties

For the first time in years, valuations -- not black swans or politics or the Fed -- are a challenge.

It’s the new Roaring Twenties, so let’s call up an authentic voice from the last such era: Thorstein Veblen, an economist and social critic who coined the phrase “conspicuous consumption.” Veblen’s most enduring observation is that the more something costs, the likelier wealthy people or status-seekers are to buy it. Economists call such baubles Veblen goods. And today they seem to be plentiful in many investors’ income portfolios.

Stocks are expensive, bond prices appear gold-plated, and real estate investment trusts just finished their best year since 2006. Gold is on a roll. The case for caution is legitimate.

Advertisement - Article continues below

Then again, the excesses of the 1920s—and other bull runs, such as those in the 1980s and 2010s—went on and on, frustrating killjoys and permabears. I’ve advocated that everyone stick with what’s working, choose higher-yielding investments over lower-yielding ones, reinvest returned cash and new money, and ignore short-term, news-driven setbacks. That’s paid off.

But I don’t know how much the market will keep bidding up the price for each dollar of interest or dividends. Is there a breaking point? And is it in sight? In 2019, the strategists and portfolio managers all told me that low inflation, falling interest rates and a compliant Federal Reserve have built a concrete floor under share prices. Buyers might hesitate, but mass selling is not in the offing.

Advertisement
Advertisement - Article continues below

However, I find that many heretofore reasonably priced dividend stocks and other investments really are rich. It’s sensible now to look over your holdings and see if you have something that appears to be vulnerable at its current price. The following isn’t a strict sell list, because if you have large embedded gains, you can better afford a correction than a capital gains tax bill. Dividends and most interest payments are not in danger. But I expect some sharp price setbacks. Here’s where I see some red flags:

Advertisement - Article continues below

AT&T. A year ago, people piled into the only bona fide blue-chip common stock with a yield above 7%. Then, you paid roughly $14 for each $1 of T dividends. Now, with AT&T (symbol T) pushing $40, the price per dollar of dividends is nearly $20. That’s steep.

Baby bonds with $25 par value trading for $27. Discounts have become scarce among these low-face-value IOUs. Never mind that the interest rate climate is more bullish now that the Fed has stopped tightening. That’s a high markup to pay for these bond snippets.

Dividend funds. The sobriquet dividend on a fund or a strategy can disguise some awfully high valuations. The 10 largest holdings of iShares Select Dividend ETF (DVY) boast a 43% one-year average return. But of those 10, only one, Dominion Energy (D) , declared much of a dividend hike in 2019.

Certain closed-end funds. Gabelli Utility Trust (GUT) has an average long-term return for a utility fund and a portfolio full of the usual suspects. Yet it commands a premium to net asset value of 57%? Even Jay Gatsby wouldn’t pay that—but somehow, someone is.

Water utilities. For years, American Water Works (AWK) and Aqua America (WTR) had price-earnings ratios in the 20s and sharply rising dividends. Now the dividend growth has slowed, and you pay over 30 times earnings for both American and Aqua. Clean water is priceless, but these shares shouldn’t make Apple look cheap.

I’m not bearish on the economy. But for the first time in years, valuations—not black swans or politics or the Fed—are a challenge. Even if investment excesses aren’t wretched, they still have a way of correcting. So, shop carefully, review what you own, and don’t chase the herd.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020
High-Tech Aids for Aging in Place
Caregiving

High-Tech Aids for Aging in Place

Apple Watch and other technology provides fast feedback, comfort for older users, and a powerful assist for caregivers.
September 23, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
10 of the Best Target-Date Fund Families
mutual funds

10 of the Best Target-Date Fund Families

The best target-date funds are a 'set it and forget it' approach to your retirement, but which fund family should you trust your money?
September 17, 2020
Best Bond Funds for Every Need
Investing for Income

Best Bond Funds for Every Need

In a changing market, it’s important to remember why we hold bonds in the first place.
September 15, 2020
Does a 40% Bond Allocation Make Sense in Today’s Portfolios?
retirement planning

Does a 40% Bond Allocation Make Sense in Today’s Portfolios?

For many investors, the short answer is no. Here’s why, and what you might consider instead.
September 7, 2020