The Joy of Getting Paid to Wait

 | Apr 28, 2014 | 10:30 AM EDT  | Comments
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Stock quotes in this article:

FB

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tsla

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goog

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amzn

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pcln

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lnkd

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nflx

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cvx

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mcd

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ge

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pm

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mo

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bns

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intc

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jnj

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pg

Here we sit, four months into 2014, and only days from the "Sell in May and go away" mentality. But that never actually happens, does it? The markets are open for the rest of the year, and there will be plenty of opportunity to make money from May through December. So where do we put our money now?

In January and February, the momentum stocks were all we heard about. Facebook (FB), Tesla (TSLA), Google (GOOG), Amazon (AMZN), Priceline (PCLN), LinkedIn (LNKD) and Netflix (NFLX) were all on a tear, and they seemed to make new highs on a daily basis. Media commentators were there to justify the stock prices, citing the growth potential for all these names.

To be fair, these are all good companies with earnings to speak of. This is unlike in the tech bubble of the late 1990s, which saw stocks skyrocketing with little to no chance that the associated companies would ever turn a profit. But even stocks with growth and earnings can see valuation get way ahead of itself as money chases returns.

While these momentum stocks were making new highs and grabbing the attention of investors, other mainstream stocks were floundering. Chevron (CVX) traded from $125 in January down to $109 in February. McDonald's (MCD) went from $100 to $92. General Electric (GE) dropped from $28 down to $24, and Philip Morris (PM) from $87 to $75. Altria (MO) slid from $38.50 to $33.80, Bank of Nova Scotia (BNS) from $63 to $54 and Intel (INTC) from $27 to $23. Johnson & Johnson (JNJ) declined from $95 to $86, and Procter & Gamble (PG) from $82 to $75.

But, since February, all of these mainstream stocks have had rallies ranging anywhere from 10% to 30% -- and with an average dividend yield of 3.25%. At the same time, all the air has come out of the momentum stocks, which have seen an average loss of 20% in that same time period.

What's the difference? These mainstream names are solid companies with dependable cash flow and dividends. When those momentum stocks turned down, there was very little chart support, because the move up had been so quick that there had been no back-and-fill action to build support levels. By contrast, if those large-cap dividend stocks undergo downturns, there are levels of support underneath -- and investors get paid to wait. They are still getting a return on investment. That is why we invest, isn't it?

We're seeing a rotation of money out of the high-flying tech names and into the relative safety of large-cap dividend companies as market players attempt to protect the profits they made in the first two months of the year. Will there be a rotation back to the tech names? I'm sure there will, but for now the names that are working are the ones that pay you to own their stock.

Buy what works until it doesn't anymore. But at least when these particular names stop climbing, they pay you to wait until the shares move again.

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