austin-distel

Investing in Fair Valued Stocks

It’s no secret that the stock market has been on an upward terror over the past few years.  And as prices continue to climb, many stocks are becoming less and less appealing to value minded investors as they become fair and overvalued.

As current stock valuations continue to climb, I am hearing more and more investors decide to accumulate cash since they are no longer finding any bargain or undervalued stocks worth purchasing.

But I’m hear to tell you that you don’t always have to buy undervalued bargain stocks.  Dividend growth investors can and should consider investing in solid consistent industry leading companies even though they are not getting a bargain price.

Paying a fair value for dividend growth companies with solid reputations of being great companies is perfectly fine.  In fact, I would encourage it.  Don’t stop investing just because you can’t find any bargains.  Find the fair value stocks and keep moving forward towards your investing and financial goals.

It’s OK to Invest in Fair Valued Stocks!

Recent history, due to the big stock market and economy crash of 2008/2009 has offered up some of the best investment bargains that many have ever experienced.  Investors were able to pick up shares of their favorite companies at bargain basement prices.

As the years have passed since, prices have been on the rise and now the bargains are hard to come by.  Sure there are still a few to find but an investor has to do a lot more digging to uncover the buried treasure.  Instead, it is more common to find companies with valuations on the higher side making them not worth a current investment.

Investors became used to purchasing shares of companies at bargain prices.  As prices have increased, investors are getting more and more scared to pull the trigger.  Instead, many investors are shying away and instead choosing to accumulate cash waiting for the next great investing opportunity.

up-down stocks

But I don’t believe that is necessarily the best strategy.

You see, I certainly haven’t quit investing.  I’ve continued on with my investing plan.  And even though I haven’t been finding as many bargains as I used to be able to a couple years back, I’m still finding plenty of companies trading at fair valuations that I’m perfectly happy to pick up shares in.

And I believe that is the way to do it.  Of course I’d rather pay lower valuations for my investments.  But over the long run, it is my opinion that it is most important to continue with the plan.  And over the long run, picking up shares of sold dividend growth companies at fair valuations will turn out to be perfectly acceptable investments.

If you decide to build up stockpiles of cash and wait for valuations to come back down to bargain levels, you may be waiting for a long time.  This means you may be sitting on the sidelines earning very little for your cash when instead you could be collecting dividend payments from some of the world’s greatest companies.

This may be OK if the market corrects itself soon.  But it is really a good idea to be forced to sit on the sidelines for 2, 3 or even 5 years waiting for lower stock prices?  The truth is, we really have no idea when the market will have a correction.  It could be tomorrow or it could be 10 years from now.  Don’t stop your plan just because you aren’t finding low valued stocks.

Continue on as long as you can find at least fair valued companies worth investing in.

This Doesn’t Mean Ignore Valuations and Invest at Any Price!

I’m not advocating that investors completely ignore valuations.

Successful investors still need to avoid overpaying for companies.  You can’t expect investments to turn out well (even over the long term) if you have majorly overpaid.

There are some companies that I believe to be currently overvalued.  I am not (and neither should you be) currently buying shares of these companies.

However, there are many others that are trading at near fair valuations.  These companies can offer reasonable long term return prospects.  These are the companies you should be buying when you no longer can find any bargains.

5 Fair Valued Companies for Your Consideration

Let’s take a look at 5 companies I believe to be currently fair valued.  This list is by no means exhaustive, but you need to do a little research for yourself to find many more companies that are trading at reasonable current valuations.

Wal-Mart Stores (WMT) – Wal-Mart is one of the world’s largest retailers.  They have a 41 year dividend growth streak and are trading just below their 10 year historical average P/E ratio. (current P/E of 15.76 vs. 16.80)
Cincinnati Financial Corp. (CINF) – Cincinnati Financial is an insurance company with a 54 year dividend growth streak.  They offer a nice +3.5% current dividend yield and are trading right at their 10 year historical average P/E ratio. (current P/E of 17.41 vs. 17.70)
McDonald’s (MCD) – This worldwide fast food restaurant company has a long 38 year dividend growth streak.  They offer a current dividend yield above 3%.  Currently, they are trading just slightly higher than their 10 year historical average P/E ratio.  (current P/E of 17.34 vs. 15.71)
Coca-Cola Company (KO) – This beverage giant has a five decade plus dividend growth streak.  They are near the upper end of fair valuation with a current P/E ratio of 21.93 vs. a historical average P/E ratio of 19.12.  For such a wonderful company, this entry point seems fair though not spectacular.
Philip Morris (PM) – Philip Morris International is an international tobacco company with a 6 year dividend growth streak.  They offer a higher yield slightly above 4%.  Currently shares of this international tobacco giant trade slightly higher than their historical average P/E ratio. (current P/E of 16.84 vs. 14.36)

Now I’m not saying these are great valuations and wonderful buys.  But I would be perfectly content with my long term outlook accumulating shares of these companies at current prices if I couldn’t find any better alternatives to invest in at the moment.

Consistency is the Key

It’s all about consistency.  You need to create a plan where you are consistently investing and growing your portfolio over time.  You need to then stick with that plan.

Don’t let a high market derail your plan.  Search and find fair valued companies that you feel comfortable with buying at current price points.  Then continue to invest.

My portfolio has continued to grow over the years because I continue putting in new money and putting that money to use.

There may come a time when I believe investors would be better off accumulating cash.  When I am no longer able to find low and fair valued companies worth purchasing, I will switch strategies to cash accumulation.  I don’t believe we are there yet.

I will continue to invest.  As long as I can find reasonably fair valued companies worth purchasing, I will do so.  When that no longer becomes the case, it will be time to pivot towards a focus of cash accumulation knowing that we will be closer towards a market correction.

What do you think?  Do you invest in fair valued companies?  Or will you only purchase bargains and undervalued stocks?

LEAVE REPLY

Your email address will not be published. Required fields are marked *

Related Posts