Thursday, August 31, 2006
CDs yield about 4.5%, 10-yr T-bonds yield near 4.7%, and 30 year T-bonds yield 4.8%. Bond investors all over the world move and shake for the best deals they can get, but at the end of the day, almost everything they buy begins with a 4. They go home at night, kiss their spouses, and watch the mad mad world of CNBC's Jim Cramer for laughs (If you haven't seen him, he's a kick). They think Cramer is bad for their profession. They think Cramer's antics might cause the investing public to get the idea that investment people are clowns at best, or deranged, at worst. Cramer, indeed, does acts like a cross between the Hunchback of Notre Dame and Knute Rockne. He twists himself into contortions while shouting gibberish, pounds on circus horns, and chews out callers for dumb questions. But then, in the persona of Knute Rockne, gives his take on 25 stocks in 10 minutes with a lucidity and passion that the Gipper would envy. The bottom line is you can call him crazy but Jim Cramer "ain't" buying nothing with a 4 on the front of it. I can debate a lot of issues with Mr. Cramer, and his style is not my style ( although I do like the circus horns), but I share his aversion to bond yields beginning with a 4. While he shoots for 20%ers in stocks of every stripe, I see many good prospects for 10%ers in good old dividend paying stocks. Let me give you one idea. Our old friend Bank of America is currently yielding 4.35%. There's that 4 again, but this is a different kind of 4. With modest success, this 4 can grow into a 10 over the next few years. Here's how to look at it: BAC is as close to a nationwide bank as we have in this country, so their growth, at the very least, ought to mirror the economic growth of the United States. The US economy has grown at a nominal rate of between 6% and 7% for decades. Let's estimate, then, that BAC can grow earnings at least at 6% per year over the next decade. BAC's earnings and dividends have grown at about the same rate for the past decade, so let's assume that the dividend will also grow at 6%. Finally, even though BAC's current dividend yield at 4.35% is higher than its 10-year average, let's assume that ten years from now it will still yield 4.35%. Using these assumptions, the 10 year internal rate of return for BAC would be approximately the current yield of 4.35% plus the dividend growth of 6% or 10.35%. Jim Cramer might be in and out of BAC a dozen times a year, and he might make a whole lot more than 10.35%, but then again, just as he "ain't" looking for nothing with a 4 on the front of it, he probably "ain't" looking at BAC's dividend yield and dividend growth the way that we are. And who knows, if he did look at the solid long-term prospects of many dividend-paying stocks, he might sleep better. This improvement is his sleep habits could diminish his hyper-activity and affinity for horns and shouting at inanimate objects. He might even stop shouting altogether, which would add a more professional demeanor to his program. With any kind of luck, he might raise the level of his program to, say, that of Lou Dobbs. Forget that I said that. Lou Dobbs has become so sane and serious that he has moved from the business of analyzing investments to the world of analyzing politics. Now that's crazy. Honk the horn all you like, Jim, I lose myself in your antics everytime I watch you. And in these days, all of us need something to take us away from the latest episode of man's inhumanity to man that we see stretched across the globe.
Labels: Company Discussion