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Market's gain last week — the start of an uptrend?
DRIPs are useful for long-term investing
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March 19, 2009 | 12:00 PM
Wow! The stock market logged a weekly gain of over 9 percent at the close on Friday, March 13. It is possible that this marked the start of an uptrend — a much-needed shot in the arm for the economy. The $64,000 question is, "Will this latest bounce-back last, and for how long?" This question has been foremost on the minds of most investors this past week, supplanting their puzzlement about how Bernard Madoff got away with his Ponzi scheme for so long.
Generally, long-term investors who plan to hold and build a portfolio over a minimum of three to five years have seen their portfolios descend 30 to 70 percent since the end of November 2007. After the market bounce-back, I was besieged by many readers of this newspaper, plus friends and family who value my knowledge of the stock market, for some indication as to whether the bottom has been reached.
Well, here goes: My contention is that at this point it is purely a short-term trader's market — individuals who are satisfied to either buy and take a few points of profit or sell short and achieve the same result. Yes, there is a ray of light at the end of the tunnel. The week that ended on March 13 brought signs that the government's stimulus plan is starting to work to some degree. The pressure put on the major banks to release funds for loans to small businesses, and to first-time homebuyers who qualify, started to have some effect.
Citigroup's chairman said that the company won't need any further government bailouts and that the firm would remain in private hands. It also advised its employees that the bank turned a profit during the first two months of 2009. J.P. Morgan Chase and Bank of America said the same thing. The banking sector is one of the important gateways to an economic recovery.
The next important factor is the president's and Congress's plan to pump money into the 50 states for infrastructure, energy and health care issues, to create thousands of jobs quickly and put people back to work.
Some investors who were fortunate enough to sell their equities early in 2008 now wonder whether they should jump back in. If they don't, they wonder if they will miss the boat should the Dow Jones, Standard & Poor or Nasdaq averages continue to rise.
Personally, I am a "show me" type of guy — very cautious with my investments. Therefore, I'll continue to wait and see if the terrific up week in the markets, ending Friday, March 13 when this article was written, was only a hoped-for bounce in the stock averages, one that, because volatility still exists, will drop once again to test its previous lows. I am not a guesser or a trader, but more of a watchful waiter.
Beginners
In the interim, beginners in our group of readers should keep to their original game plan, with a three- to five-year outlook on high-quality core investments. I'm sure that you will be happy campers in the long run.
To reiterate what I recommended for purchase in my last two articles, you should accumulate shares of Abbott Labs (NYSE: ABT) even in this volatile market. How should you do this? Well, if you purchase shares monthly, quarterly, semi-annually or annually through your broker, you will pay commission on every purchase. In addition, your brokerage firm may not reinvest fractional shares but just credit the cash to your account. Either way, it is much more costly and, in the long run, limits the amount you garner through dividend compounding.
In my opinion, the best way to purchase the stock is to contact Abbott Labs directly through Computer Share Transfer Agent, PO Box 43078, Providence, RI 02940. They will answer your questions about the Abbott dividend reinvestment plan (DRIP). If you have not already commenced this program, do so now to save all commissions and receive quarterly statements from Abbott on your account. I have followed Abbott over many years and am happy to say so with a smile on my face.
This company is a global health care company devoted to discovery, development, manufacture and marketing of pharmaceuticals, medical products, devices, diagnostics and nutritional supplements. Abbott employs more than 72,000 people and markets its products in more than 130 countries. News and other information is available at www.abbott.com.
Abbott closed on March 13 at $46.85 per share. Based on its projected 2009 earnings, there will be little risk to you if you put in your purchase price at anywhere between $44 and $50.
Seniors
Our seniors who have been hit hard by the drop in their 401(k)s and other pension plans may still be a bit leery about investing in any one dividend stock. I suggest that they might try an exchange traded fund (ETF), which operates similarly to a common stock but holds many high-dividend payers. The fact that the fund holds many dividend-paying securities in its portfolio minimizes your risk if any one company lowers its dividend in this volatile market. Even some of the most desirable dividend-paying corporations have had to cut their dividends recently to preserve cash in order to further grow their business. General Electric, Pfizer and U.S. Bancorp are but three of many who've done so. ETFs that I recommend are:
• Standard & Poor's 500 ETF (NYSE: SPY). Its price of $76.09 per share on March 13 was about half its 52-week high.
• Dow Jones Select Dividend ETF (NYSE: DVY) invests in the 100 highest-yielding U.S. securities that have a five-year history or longer.
• Among mutual funds, Vanguard Dividend Growth (VDIGX) carries a miniscule expense ratio, a 2.79 percent yield, and a five-star rating, the highest, from Morningstar. That would be my choice for this year.
Savvy investors
Our savvy investors should do their homework and watch Pfizer (NYSE: PFE), showing an 8.8 percent yield, selling at over 12 times earnings. It rose $1.81, closing at $14.54 on March 13. The world's biggest drug maker surged 9.6 percent after it said a late-stage study showed its cancer drug, Sutent, delayed progression of a rare form of pancreatic cancer. Pfizer halted its study of Sutent to enable all patients in the trial to take the drug after it became apparent that the medication successfully treated the disease. Sutent is currently approved for treating advanced kidney cancer as well as gastrointestinal tract tumors. Your chances of making a rather quick short-term profit with Pfizer are better than picking the winner of the Kentucky Derby.
That's if for now. Stay healthy and optimistic and enjoy lots of luck with your investments.
Ted Kaplan, a former stockbroker, is a longtime investor. The views expressed here are not endorsed by Times Beacon Record Newspapers.
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