Going For A Premium Valuation

Bernanke’s statement yesterday has given more fuel to the bull’s fire.   He told Congress that unemployment is still too low and there will be no end to the Fed’s fake economy anytime soon.  While Big Ben is saying they won’t stop until they need to, other members of the Fed support ending this stimulus very soon.  So what’s a dividend investor supposed to do?  All I can do is play along and watch the market keep moving higher. It will be interesting to see though if these recent Fed minutes give the market that short term set back everyone has been waiting for.

I started getting curious this week and went looking to see just how much money the Fed has “printed” in the last few years.  I know they don’t actually print all the extra cash but just manufacture it out of thin air electronically to assist with adding to bank liquidity and buying bonds.

The numbers were not that surprising… a 35% increase since January 2009.  While that is sad, it also helps give a little perspective on where stocks are headed as a result of Fed policy.

Basic inflation plus currency devaluation has me wondering where we are headed in 2013.  Dow 17,000 in 2013 is not impossible.

At that point I believe the market will be trading at a premium and it will be hard to stay in.  That brings up another important question that long term dividend investors need to answer.  How overvalued do your stocks have to be before you would sell them?  Dividend investors like myself need to start thinking and planning ahead.

Here are a few investment and finance posts I’ve been reading this week.

The Dividend Guy takes a look at Disney as a dividend investment.
Dividend Growth Stock Investing explains the power of dividend investing and reinvested payouts.
The Passive Income Earner shares a list of the top 20 dividend stocks.
Financially Integrated has a great post about dividend investing for young investors.
My Fi Journey goes into part 2 of how to evaluate a REIT.
My Own Advisor shares 3 ways to spend your tax refund.


  1. Thanks for the mention Dividend Ladder!

    For me, the point where I start looking at a stock to consider selling is when it reaches a P/E of at least 30. So my companies still have a ways to go before I will look at possibly selling. However, I take certain things into consideration. Such as what other options are currently available. There has to be an opportunity that I believe to be good enough to make me sell and incur selling commissions and capital gains taxes.

    Now if a company becomes even more overvalued, say closer to 35 or above. I will probably most likely sell. I will then look for something better to invest in or sit in cash. The kinds of companies I invest in won’t be staying at those kinds of valuations for too long. The market will correct itself giving me opportunity to buy right back into those companies soon enough.

    • Dividend Ladder

      Its hard to imagine stocks like JNJ or KO trading at 35 times earnings but I guess it could happen some day.

  2. Honestly I’m kind of surprised to see it’s only a 35% increase in the money supply given all the talk about how much they’ve pumped in. If they keep the gas pedal down then the markets will continue along but as soon as the brakes are put on no matter how good the economy is doing I think we’ll see a correction just because of them stopping. Heck it’s all we’ve known for 4 years.

    Most of the companies I own I want to just hold for the long term. Although if KO or PG or the like trade for 30+ P/E ratios I think it’d be hard to not sell unless the growth potential is there to justify that. But given their sizes I don’t see that kind of growth returning.

  3. I like this trading action we could see yesterday and today. I can see a few stocks of my interest dropped in price to levels where I will be interested in buying. Let’s see what tomorrow will bring. I am excited. I agree with your question and then assumption on the future move. Is this the beginning of something bigger or just a blip? Will the Big Ben’s policy continue pushing the markets higher? What I liked was that Big Ben proposed a possible end of screwing the US economy and the markets dropped. What a hilarious move!

  4. Larry

    He did hint that they could taper QE in the next few meetings. Which is what drove the markets down from triple digit gains to near a 100 point loss before recovering near the end of the session. There could be a correction in the short term, but that doesn’t bother me too much. I know there will always be long term inflation and that will always make stocks go up in the long run.

  5. I think its a capital reallocation question. Where else can you put your money to generate reasonable returns? If bond returns and cash rates are where they currently are then Ill probably continue to stay invested, in spite of full valuation

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