This week I’ve dug into my inbox to answer questions sent by readers. (Questions have been edited for length and will remain anonymous.)

Where can I get some yield?  My cash isn’t earning any interest and CDs aren’t offering much either.  What do you think about investing in dividend stocks to get some return on my money?

I feel your pain.  Nobody likes seeing essentially zero yield on their cash savings.  Normally CDs and money markets yields are better, but their yields are also pitifully low.  Even the 10-year Treasury yields a measly 2.6%.

But don’t do anything drastic.  The Federal Reserve has pushed interest rates so low to encourage investors to move money into higher-yielding assets such as stocks and corporate debt to sustain the expansion.

More and more investors are asking me about dividend-paying stocks as a way to increase their portfolio’s yield, but are doing so without a long-term horizon.  Sure you can get a 6.3% yield on Verizon stock, but there is no guarantee that you will pocket your original investment.  If interest rates go up or anything goes wrong at Verizon, you may find the stock is worth a lot less than you paid.  In short: stocks are not to be treated as bonds.

Don’t forget the purpose of your fixed income allocation.  It is to protect you principal, not generate as much yield as possible.  If you want more interest income, then you must be patient and wait for rates to rise.  Equally important, you should not be investing money in the stock market that you might need in the next few years.

It has been a long time since you have written about a particular stock or industry.  Is this because you don’t think there are any good values out there?

I generally hesitate to make specific recommendations in the Market Minute because I don’t want to encourage someone to put all of their money into one stock, industry, or even country.  More importantly, not everyone has the same financial situation or goals.  That said, I think there are a few areas of value out there for the patient investor.

I like the risk/reward profile among some companies in the energy sector, especially drillers Transocean (RIG) and Noble (NE), as well as majors like Chevron (CVX).  I’ve believed all along that RIG and NE were oversold in response to the BP oil spill and U.S. deepwater drilling moratorium.  RIG and NE have massive backlogs and tremendous competitive advantages that provide great revenue visibility and earnings potential.  Like the drillers, CVX is highly correlated to the price of oil (more so than other oil majors) and stands to benefit from any spike in oil prices.  I don’t see oil prices returning to $100 a barrel any time soon, but I think it is just as unlikely oil prices make a sustained move below $70 a barrel.

Defense companies are another favorite of mine.  Firms like Lockheed Martin (LMT) and General Dynamics (GD) trade at ridiculous discounts to the overall market and pay fat dividends that are growing at favorable rates.  Defense valuations are unusually low across the board, even when compared to prior periods of declining defense spending.  But defense companies are like insurance: no one knows when the next war or crisis will break, but when it does, profit margins and sales expand rapidly.  Now is your chance to buy them cheap.

Finally, I’m a fan of a few areas within the healthcare sector, particularly pharmaceuticals like Johnson & Johnson (JNJ) and diagnostic labs like Quest Diagnostics (DGX).  I recently wrote about JNJ in this Acropolis Daily Insight.  As for DGX, it should benefit as illness prevention and early detection of diseases play critical roles in reducing U.S. healthcare costs.  DGX carries an attractive valuation, but its enormous scale sets it apart from competitors in the largely fragmented diagnostic-services marketplace.

A follow up question to last week’s review of the financial regulatory reform: How do you think bank CEOs are feeling about the Basel III capital requirements?

The reader is referring to new capital requirements to provide a cushion against losses in an economic downturn that were agreed upon by a group of regulators and central bankers from around the world, including our own Ben Bernanke.  

Overall, the new capital standards are less stringent than many feared.  In fact, the biggest U.S. banks already exceed the requirements and, thus, should feel very little impact.  Still, banks that the Fed deems “systemically important” are still uncertain about the amount and type of additional capital they will be required to maintain – you can count on the amount being higher. 

The financial regulatory environment is becoming a bit less opaque, but I don’t expect banks to dramatically increase lending just yet.  I do, however, believe we will start seeing the healthiest banks hike their dividends in the next 12 months. 

To more directly answer your question, bank CEOs would tell you these requirements will reduce profitability, decrease credit availability, and increase the cost of borrowing.  These effects, in turn, could reduce GDP.   This may hold true in the near-term, but may not in the longer-term as banks adjust their business models.

In my opinion, these capital requirements should have also included some automatic stabilizers that would have required banks to carry more capital as the economy expands and less capital as it contracts. 

That’s all for this week.  Thanks for reading.

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Peter Lazaroff, Investment Analyst

www.acrinv.com