Chasing Value: Granny Said, 'It Has Turned into One Big Casino'

Posted Aug 16th 2010 1:30PM by Sheldon Liber
Filed under: Getting Started, McDonald's (MCD), International Business Machines (IBM), Diageo plc (DEO), Johnson and Johnson (JNJ), Altria Group (MO), Novartis AG ADS (NVS), Automatic Data Proc (ADP), Kellogg Co (K), Consolidated Edison (ED), General Mills (GIS), Procter and Gamble (PG), Merck and Co (MRK), Duke Energy (DUK), Chasing Value™, Stocks to Buy, Southern Company (SO), Annaly Capital Management (NLY)

Here is a common sentiment about the stock market: "No fun at all. As I have said before, I believe it has turned into one big casino largely divorced from its original goal of providing capital to companies who produce something of value."

There's a lot of truth to what "granny" recently said to me in an e-mail. Fortunately she also noted "FYI Granny's up 5.86% + dividends." That would give her a gain of about 10% in the past ten months since I posted Where should granny put $50,000, suggesting a very conservative portfolio for an uncertain time.

Not only has she earned a very nice return, surpassing her CD account by 9.5% (20 fold), but she was able to do so with a great deal less volatility than the overall market most of us have lived through.

You can make money in a casino if you are the house, an experienced poker player, or the government collecting taxes. For everyone else, beware. The recently enacted Dodd-Frank financial reform bill may do a little to change things, but it will be a far cry from the type of reform the public has been screaming for.

The following stocks are the "granny portfolio," and if you bought them today you would be much better off than you would be buying Treasuries, CDs, corporate bonds or lottery tickets. These 14 stocks pay roughly 3% to 15% in dividends and most of them have a history of increasing dividends.

Consolidated Edison (ED)
Duke Energy (DUK)
Southern Company (SO)
Johnson & Johnson (JNJ)
Merck & Co. (MRK)
Novartis AG (NVS)
Altria (MO)
Diageo (DEO)
McDonald's (MCD)
Annaly Capital Management (NLY)
Automatic Data Processing (ADP)
General Mills (GIS)
Kellogg (K)
Procter & Gamble (PG)

Speaking of dividends, I have been appalled at two recent offerings that were sucked up by investors in no time flat, and they are very bad investments. Both were reported in Barron's and elsewhere.

The first was $450 million in 10-year corporate bonds with a 3.55% yield from McDonald's, which is only fractionally better than the comparable Treasury note. To me this is preposterous because McDonald's dividend yield is 3.1% and I do not believe that the stock has ever gone down over a 10-year period, and it has in most cases appreciated significantly. Barron's gave MCD a wink and a nod for having successfully completed such a suspect deal.

The other equally silly offering was issued by International Business Machines (IBM), putting out $1.5 billion of three-year corporate bonds offering a measly 1% return, the lowest of all time. This is simply ridiculous, but not half as ridiculous as folks soaking it all up. This is less than half IBM's annual dividend yield if you bought the stock.

Imagine how these fixed-rate bonds will get mauled when our current zero rates move up. I wish I could borrow money at 1%. I would just invest all of it in granny's diversified portfolio, and it would become a perpetual money-making machine.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money.

Disclosure: I own shares of BND, DUK, SO, JNJ, MRK, NVS, DEO and NLY.

Tags: ADP, Altria, AnnalyCapitalManagement, automatic data processing, ChasingValue, DEO, diageo, DUK, Duke Energy, featured, general mills, IBM Corp., international business machines, JNJ, johnson and johnson, Kellogg, MCD, mcdonalds, Merck, MO, MRK, NLY, Novartis, NVS, PG, procter and gamble, SO, SouthernCompany