40 KIPLINGER’S PERSONAL FINANCE^ 03/2020POONWAT
CHARA-AMPHAIW
ANawfully high valuations. The 10 largest
holdings of iShares Select Dividend
ETF (DVY) boast a 43% one-year aver-
age return. But of those 10, only one,
Dominion Energy, declared much of
a dividend hike in 2019.Certain closed-end funds. Gabelli Utility
Trust (GUT) has an average long-term
return for a utility fund and a portfolio
full of the usual suspects. Yet it com-
mands a premium to net asset value
of 57%? Even Jay Gatsby wouldn’t pay
that—but somehow, someone is.Water utilities. For years, American
Water Works (AWK) and Aqua Amer-
ica (WTR) had price-earnings ratios in
the 20s and sharply rising dividends.
Now the dividend growth has slowed,
and you pay over 30 times earnings for
both American and Aqua. Clean water
is priceless, but these shares shouldn’t
make Apple look cheap.
I’m not bearish on the
economy. But for the first
time in years, valuations—
not black swans or poli-
tics or the Fed—are a
challenge. Even if invest-
ment excesses aren’t
wretched, they
still have a
way of cor-
recting.
So, shop
carefully,
review
what you
own, and
don’t
chase the
herd. ■INCOME INVESTING Jeffrey R. KosnettBeware the Roaring Twenties
I
t’s the new Roaring Twenties, so
let’s call up an authentic voice from
the last such era: Thorstein Veblen,
an economist and social critic who
coined the phrase “conspicuous con-
sumption.” Veblen’s most enduring
observation is that the more some-
thing costs, the likelier wealthy people
or status-seekers are to buy it. Econo-
mists call such baubles Veblen goods.
And today they seem to be plentiful
in many investors’ income portfolios.
Stocks are expensive, bond prices
appear gold-plated, and real estate
investment trusts just finished their
best year since 2006. Gold is on a roll.
The case for caution is legitimate.
Then again, the excesses of the
1920s—and other bull runs, such as
those in the 1980s and 2010s—went
on and on, frustrating killjoys and
permabears. I’ve advocated that
everyone stick with what’s working,
choose higher-yielding investments
over lower-yielding ones, reinvest
returned cash and new
money, and ignore short-
term, news-driven set-
backs. That’s paid off.
But I don’t know how
much the market will
keep bidding up the price
for each dollar of interest
or dividends. Is there a
breaking point? And is
it in sight? In 2019, the
strategists and portfolio managers
all told me that low inf lation, falling
interest rates and a compliant Federal
Reserve have built a concrete f loor
under share prices. Buyers might
hesitate, but mass selling is not in the
offing.
However, I find that many heretofore
reasonably priced dividend stocks
and other investments really are rich.
It’s sensible now to look over yourholdings and see if you have some-
thing that appears to be vulnerable
at its current price. The following isn’t
a strict sell list, because if you have
large embedded gains, you can better
afford a correction than a capital gains
tax bill. Dividends and most interest
payments are not in danger. But I ex-
pect some sharp price setbacks. Here’s
where I see some red f lags:AT&T (symbol T). A year ago, people
piled into the only bona fide blue-chip
common stock with a yield above 7%.
Then, you paid roughly $14 for each
$1 of T dividends. Now, with the stock
pushing $40, the price per dollar of
dividends is nearly $20. That’s steep.Baby bonds with $25 par value trading
for $27. Discounts have become scarce
among these low-face-value IOUs.
Never mind that the interest rate
climate is more bullish now that
the Fed has stopped tightening.That’s a high
markup to pay
for these bond
snippets.Dividend
funds. The
sobriquet
dividend on a
fund or a strategy
can disguise someJEFF KOSNETT IS EDITOR OF
KIPLINGER’S INVESTING FOR
INCOME. YOU CAN REACH
HIM AT JEFF_KOSNETT@
KIPLINGER.COM.FOR THE FIRST TIME IN YEARS,
VALUATIONS—NOT BLACK
SWANS OR POLITICS OR THE
FED—ARE A CHALLENGE.INVESTING Commentary