What if you ignored the market’s mood, though? Would it make a difference?

If you can find managers focused on buying and holding the best stocks – no matter how the rest of the market is behaving – you might reap higher gains over time.

C. Thomas Howard, professor emeritus at the University of Denver, has found that managers who invest in what he defines as the “best markets” for overall stock performance and the stocks that represent the “best ideas” will outperform market indexes. Howard identified hundreds of companies that fit his criteria and could have been bought at bargain prices.

Examining a period from April 2003 to March 2013, Howard found in a recent paper that his “best idea” group of 400 stocks, which includes Google, Ethan Allen Interiors and MasTec, gained almost 17 percent, compared with 9 percent for the Russell 3000 Index.

The “best market” group did even better: It was up 27 percent, versus 9 percent for the Russell 3000. Leading that pack are stocks in developed international markets and small U.S. companies.

The reason for such outperformance? Managers made “emotionally difficult” decisions to buy out-of-favor stocks, ignore short-term volatility and hold their picks through market swoons.

These managers generally run smaller funds like Invesco Endeavor A, which focuses on small- to mid-cap stocks and is up 33 percent for the past year through June 14, or Bridgeway Ultra Small Company, which focuses on companies with an average market cap of $225 million and has gained 50 percent during the same period.

But most investors can’t stomach such a contrarian approach and gravitate toward older, brand-name funds that mimic the market and focus on bolstering assets.

“Perverse industry incentives and emotional investors combine to incent funds to invest in other than best idea stocks and so performance declines accordingly,” Howard told me in an email. “Funds underperform not because of the lack of skill, but because of the incentives they face.”

In other words, managers often feel compelled to own popular stocks in order to build fund assets, although it may not be the most profitable long-term strategy.

THE DEEP-VALUE STRATEGY

If some of this theory sounds familiar, it’s because it echoes the work of contrarian, deep-value investors who specialize in identifying quality stocks they think the market has underpriced, then hold them for years.

Meir Statman, a professor of finance at Santa Clara University who read the Howard paper, sees a shortcoming of such behavioral stockpicking. The common error, he says, is a hindsight bias, when past results are used to extrapolate future returns.

Investors who choose deep-value managers, you’ll need to stick with them, since value stocks go in and out of favor with market turns. These stockpickers don’t always make money and may lag the market when others are gaining.

It’s equally important to pay attention to the costs of contrarian stockpicking. Unless you choose a passive value fund that essentially buys an index, you may pay a relatively steep price for an actively managed value fund because of research and other expenses.

The Third Avenue Fund, for example, charges 1.4 percent annually for management expenses. It’s up 28 percent over the past year. Top holdings include Wheelcock & Co, Bank of New York Mellon and Toyota Industries.

You may do better by buying an index fund like the SPDR S&P 400 Value fund, which is up 30 percent over the year. It costs only 0.20 percent annually.

Deep-value representation in the form of a stock fund can balance out the conventional growth index offerings in your portfolio.

You never know when value will be in favor. It follows waves that are considerably less predictable than the Fed’s moves.

(Editing by Lauren Young and Douglas Royalty)

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

Yet few people really believe that will work – they don’t like staying still – so they chase active managers or pick stocks themselves, usually buying and selling at the wrong times. They deceive themselves into thinking that they can outwit the smartest managers in the world and their costs won’t sink them.

With the stock market flattening out and perhaps taking a breather from its first-half surge, it’s worth taking a look at Fama’s basic tenets to avoid such bad behavior. (I recently had the chance to speak to him during a conference at the university sponsored by Loring Ward, an investment manager based in San Jose, California.)

Fama is best-known for research with long-time partner Kenneth French, a professor of Dartmouth College, which shows that certain groups of stocks tend to outperform over time: Value stocks bought at bargain prices tend to do better than companies focused on growth. Small companies tend to outpace large ones.

Known as the Fama-French “Three-Factor Model,” company size, style and market risk are essential to employ in a diversified portfolio.

Small-company stocks, for example, averaged an annualized return of 16 percent from 1926 through 2012, according to Ibbotson Associates. That compares to about 12 percent for large companies and 3.5 percent for U.S. Treasury bills.

Using Fama and French’s research, if you constructed a portfolio of large-value stocks, you’d average about 14.5 percent on an annualized basis if you held it from 1928 through 2012. A portfolio of small-value companies averaged nearly 19 percent.

These tendencies, observed in decades of data analysis by Fama and French, don’t happen every year, nor do they reduce risk if you try to jump in and out of each group. The standard deviation, or volatility, ranges from 20 percent for large-growth stocks to 33 percent for small-growth.

The key is to sample the entire market through a total-market fund, because you can’t know which group will be the top performer in any given year. Popular indexes like the S&P 500 tend to favor the largest companies by market value.

IS YOUR MANAGER GOOD?

“It’s difficult, if not impossible, to tell who a good manager is,” Fama says. He says you need at least three decades worth of data, then see if those results are better than chance.

While such data is nonexistent for most money managers – simply because they haven’t been around long enough – the odds are against them if they are active mutual fund managers.

Last year, with the exception of large-cap growth and real estate funds, all other types of actively managed funds lagged their benchmarks, according to Standard & Poor’s. Returns of the active managers trailed indices in 63 percent of large-cap funds, 80 percent of mid-caps and 66 percent of small-cap funds

Research by Fama and French in 2009 found no statistical evidence that active mutual fund managers as a whole can enhance returns. In fact, the average return of this group was a negative 0.18 percent annually from 1984-2006.

If you want to know if your fund manager is doing a good job, Fama says that 1 percent above a broad market index is considered above average.

This has to be one of the most disappointing numbers for active investors who are hoping to beat the market by a large margin. Keep in mind that this is net of management fees, taxes and inflation. Most managers can’t do this consistently.

In fact, while Fama has spent decades debunking market timing and active management, he was taken aback when I asked him how investors can resist the temptation to invest in hot-performing managers who appear to have momentum.

“Why are you asking me?” said Fama, who is a board member of Dimensional Fund Advisors, a largely passive manager of more than $280 billion, based in Austin, Texas. “I don’t look at my portfolio. Mutual funds always get more money when their performance is hot. I’ve been screaming about this for 50 years.”

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here; Editing by Lauren Young and Tim Dobbyn)

Since most U.S. homes are still framed with wood, timber becomes a more valuable commodity as new construction booms. Home prices gained the most in seven years in March, according to a recent S&P Case-Shiller housing index report. Housing starts in April rose 16 percent over the previous month with new building permits up 14 percent, according to the U.S. Census Bureau.

North American sawmills are running at the fastest pace in six years, up nearly 7 percent over last year, according to CIBC World Markets, a Canada-based investment bank. Growth in China is also contributing to the rebound. More than 60 percent of log exports from the Pacific Northwest head to the People’s Republic.

Timber is also becoming more scarce as forests shrink. As a commodity, it provides an inflation hedge, too; the S&P Global Timber & Forestry index has produced an annualized return of nearly 7 percent over the past three years through April 30. The current Consumer Price Index is running at an average 1 percent.

Why invest in timber and related resource companies instead of the obvious play in homebuilder stocks? Those companies have been rallying for more than a year and are pricey.

The SPDR S&P Homebuilders ETF, for example, a fund that holds most of the major home-construction companies, is up more than 50 percent over the past year through Friday, almost double the price of a consumer cyclical index. That portfolio’s price-earnings ratio – what investors are willing to pay for a dollar of expected earnings – is 20, compared to 14.4, for the SP 500.

The underlying S&P index for the timber sector has climbed more than 31 percent over the past year through May 31 compared to a nearly 50-percent gain for the S&P Homebuilders Index. The iShares Global Timber and Forestry Index ETF (WOOD), has p/e of 18; that’s not a bargain price either, but timber stocks are a better value now relative to homebuilding stocks and may have more upside.

REGIONAL VIEW

Most timber companies specialize in specific regions where they own or lease properties. But to obtain global diversification, it’s best to consider one of two exchange-traded funds on the market that hold timber, packaging and real estate investment trusts (REITs) that own lumber resources.

The Guggenheim Timber ETF, holds major producers like Weyerhaeuser Co and International Paper Co. It tracks the Beacon Global Timber Index, which holds companies that own or lease forested land or produce wood-based products. More than 40 percent of the companies are based in greater Europe or Asia. It’s up 8 percent year to date through May 31 and gained 25 percent last year.

As an alternative, the iShares timber ETF mentioned above has more than 60 percent of its holdings in the Americas, including Plum Creek Timber Company Inc and Potlatch Corp. The iShares fund is a better deal on expenses than the Guggenheim product, charging 0.48 percent annually for management, compared to 0.70 percent for the Guggenheim fund. It’s gained 4 percent year to date and 23 percent last year.

Of the two ETFs, the iShares fund offers more total international exposure, including 13 percent stakes in Brazilian companies and 11 percent in Japan, says Eric Dutram, ETF analyst at Zacks Investment Research in Chicago. Either way, the two funds are reasonably priced, he said.

Many timber companies give you a bonus if they’re vertically integrated. They could mean they are producing value-added products like rayon, packaging or paper, which also would benefit from a broad economic recovery. These companies may also own or lease land that may result in other mineral plays such as petroleum or natural gas.

Keep in mind that timber trends can cut the other way. As funds specializing in a handful of commodities that rise and fall directly with economic demand, these ETFs are not for nervous investors. Guggenenheim Timber lost nearly half its value in 2008 and has a 32-percent five-year standard deviation, a volatility gauge. That compares to 20 percent for a world natural resources stock index.

If the housing market goes south again, then these ETFs will suffer. Consider them only as small parts of a larger portfolio and not large holdings.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here Editing by Linda Stern and Andrew Hay)

Since most U.S. homes are still framed with wood, timber
becomes a more valuable commodity as new construction booms.
Home prices gained the most in seven years in March, according
to a recent S&P Case-Shiller housing index report. Housing
starts in April rose 16 percent over the previous month with new
building permits up 14 percent, according to the U.S. Census
Bureau.

North American sawmills are running at the fastest pace in
six years, up nearly 7 percent over last year, according to CIBC
World Markets, a Canada-based investment bank. Growth in China
is also contributing to the rebound. More than 60 percent of log
exports from the Pacific Northwest head to the People’s
Republic.

Timber is also becoming more scarce as forests shrink. As a
commodity, it provides an inflation hedge, too; the S&P Global
Timber & Forestry index has produced an annualized return of
nearly 7 percent over the past three years through April 30. The
current Consumer Price Index is running at an average 1 percent.

Why invest in timber and related resource companies instead
of the obvious play in homebuilder stocks? Those companies have
been rallying for more than a year and are pricey.

The SPDR S&P Homebuilders ETF, for example, a fund
that holds most of the major home-construction companies, is up
more than 50 percent over the past year through Friday, almost
double the price of a consumer cyclical index. That portfolio’s
price-earnings ratio – what investors are willing to pay for a
dollar of expected earnings – is 20, compared to 14.4, for the
SP 500.

The underlying S&P index for the timber sector has climbed
more than 31 percent over the past year through May 31 compared
to a nearly 50-percent gain for the S&P Homebuilders Index. The
iShares Global Timber and Forestry Index ETF (WOOD), has p/e of
18; that’s not a bargain price either, but timber stocks are a
better value now relative to homebuilding stocks and may have
more upside.

REGIONAL VIEW

Most timber companies specialize in specific regions where
they own or lease properties. But to obtain global
diversification, it’s best to consider one of two
exchange-traded funds on the market that hold timber, packaging
and real estate investment trusts (REITs) that own lumber
resources.

The Guggenheim Timber ETF, holds major producers
like Weyerhaeuser Co and International Paper Co.
It tracks the Beacon Global Timber Index, which holds companies
that own or lease forested land or produce wood-based products.
More than 40 percent of the companies are based in greater
Europe or Asia. It’s up 8 percent year to date through May 31
and gained 25 percent last year.

As an alternative, the iShares timber ETF mentioned above
has more than 60 percent of its holdings in the Americas,
including Plum Creek Timber Company Inc and Potlatch
Corp. The iShares fund is a better deal on expenses than
the Guggenheim product, charging 0.48 percent annually for
management, compared to 0.70 percent for the Guggenheim fund.
It’s gained 4 percent year to date and 23 percent last year.

Of the two ETFs, the iShares fund offeres more total
international exposure, including 13 percent stakes in Brazilian
companies and 11 percent in Japan, says Eric Dutram, ETF analyst
at Zacks Investment Research in Chicago. Either way, the two
funds are reasonably priced, he said.

Many timber companies give you a bonus if they’re vertically
integrated. They could mean they are producing value-added
products like rayon, packaging or paper, which also would
benefit from a broad economic recovery. These companies may also
own or lease land that may result in other mineral plays such as
petroleum or natural gas.

Keep in mind that timber trends can cut the other way. As
funds specializing in a handful of commodities that rise and
fall directly with economic demand, these ETFs are not for
nervous investors. Guggenenheim Timber lost nearly half its
value in 2008 and has a 32-percent five-year standard deviation,
a volatility gauge. That compares to 20 percent for a world
natural resources stock index.

If the housing market goes south again, then these ETFs will
suffer. Consider them only as small parts of a larger portfolio
and not large holdings.

An uptick in yields smacked bond prices, which move inversely to yields. Funds investing in high-yield and long-maturity issues got hit the worst. Yields on 10-year Treasury Notes hit a peak of 2.23 percent, the highest since April of last year, before dropping to 2.16 percent on Wednesday.

The pre-June bond swoon is a harbinger of things to come. The U.S. economy is heating up after years of decline, which will trigger greater demand for credit and lower bond prices.

The good news? There are a bevy of alternative vehicles to help you hedge bond price surges.

But first, some things to consider: Bond yields have largely been watered down by the Federal Reserve’s bond-buying program in an effort to grow employment and the economy since the 2008 market and credit meltdown. The U.S. economy grew 1.7 percent in 2011 and 2.2 percent last year.

The U.S. is expected to grow nearly 2 percent this year and about 3 percent in 2014, according to a report released on Wednesday by the Organization for Economic Cooperation and Development (OECD), which added fuel to the credit market flare up. The organization said a Fed retreat from its easing program could lead to lower bond prices.

Now traders fear the Fed will take its hands off the throttle of its stimulus engine to slow its bond purchases. That has led to the yips in the most volatile bond funds of late.

“While I don’t believe the Fed’s bond buying program will imminently cease,” said Jack Ablin, chief investment officer for BMO Private Bank in Chicago. “I do think that ‘taper talk’ will lead to high bond yields. We have been bond skeptics for a while; however, we have added bearish bond positions in income-oriented portfolios.”

MOST SKITTISH FUNDS

In recent years, high-yield corporate or “junk” bond funds have been the darlings of income-oriented investors. These low-rated bonds have always had a high risk of default, but have paid healthy yields.

Investors have been well compensated for the additional risk, which is closely linked to the stock market. Yet that risk can be biting. One of the largest junk-bond ETFs – the iShares iBoxx $ High Yield Corporate Bond fund – lost more than 1 percent in a week through May 29. It’s up almost 3 percent year to date and yields 6 percent over the past year.

The SPDR Barclays High Yield Bond Fund, has had similar troubles, losing 1 percent in a week. It’s gained 3 percent year to date and yields 6 percent. Keep in mind that these funds will always be subject to amplified volatility, so they should only be small holdings in your income portfolios.

Most bond investors, though, probably sample the broad section of the U.S. bond market through a giant index fund such as the Vanguard Total Bond Market Fund, which yields about 1.6 percent. It’s also feeling the sting of lower prices, though, having lost 0.47 percent in the past week and 0.76 percent year to date.

HOW TO HEDGE BOND MOVEMENTS

Not all bond funds react the same to rate moves. Those with a shorter duration – the amount of money you can lose if interest rates rise one percentage point – will hold their value better than long-maturity (20 years or more) or junk bond funds. The iShares 1-3 Year Credit Bond ETF, which holds short-term corporate debt, lost only 0.05 percent in the past week and is up 0.47 percent year to date. With this lower risk profile, though, comes a much lower yield of 1.5 percent.

There are a bevy of alternative vehicles that can help you hedge bond price surges. I’ve always liked I Savings Bonds, which are linked to the consumer price index. If inflation comes back, you will earn the current Treasury yield plus a bonus rate pegged to the U.S. cost of living. You can buy them for as little as $25 commission-free through Treasurydirect.gov. Interest is compounded semi-annually for up to 30 years.

If you’re working with a trusted adviser or want to do something daring, you can employ a hedging strategy using inverse ETFs. The prices on these vehicles rise when bond prices fall.

You can “short” nearly any kind of bond. For example, let’s say you owned long-maturity government bonds and wanted to protect yourself. You could buy an ETF such as the ProShares 20+ Treasury ETF, which was up about 1 percent in the past week and gained 3 percent year to date.

Just keep in mind that these vehicles are more volatile than junk-bond funds when rates are low or falling. The ProShares fund has lost an average 12 percent over the past three years.

The simplest approach, though, is to buy a diversified portfolio of the highest-rated individual Treasury, corporate or municipal bonds through a deep-discount broker. When yields rise, find the bonds with the best coupons and hold them to maturity.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Editing by Lauren Young and Andre Grenon)

An uptick in yields smacked bond prices, which move inversely to yields. Funds investing in high-yield and long-maturity issues got hit the worst. Yields on 10-year Treasury Notes hit a peak of 2.23 percent, the highest since April of last year, before dropping to 2.16 percent on Wednesday.

The pre-June bond swoon is a harbinger of things to come. The U.S. economy is heating up after years of decline, which will trigger greater demand for credit and lower bond prices.

The good news? There are a bevy of alternative vehicles to help you hedge bond price surges.

But first, some things to consider: Bond yields have largely been watered down by the Federal Reserve’s bond-buying program in an effort to grow employment and the economy since the 2008 market and credit meltdown. The U.S. economy grew 1.7 percent in 2011 and 2.2 percent last year.

The U.S. is expected to grow nearly 2 percent this year and about 3 percent in 2014, according to a report released on Wednesday by the Organization for Economic Cooperation and Development (OECD), which added fuel to the credit market flare up. The organization said a Fed retreat from its easing program could lead to lower bond prices.

Now traders fear the Fed will take its hands off the throttle of its stimulus engine to slow its bond purchases. That has led to the yips in the most volatile bond funds of late.

“While I don’t believe the Fed’s bond buying program will imminently cease,” said Jack Ablin, chief investment officer for BMO Private Bank in Chicago. “I do think that ‘taper talk’ will lead to high bond yields. We have been bond skeptics for a while; however, we have added bearish bond positions in income-oriented portfolios.”

MOST SKITTISH FUNDS

In recent years, high-yield corporate or “junk” bond funds have been the darlings of income-oriented investors. These low-rated bonds have always had a high risk of default, but have paid healthy yields.

Investors have been well compensated for the additional risk, which is closely linked to the stock market. Yet that risk can be biting. One of the largest junk-bond ETFs – the iShares iBoxx $ High Yield Corporate Bond fund – lost more than 1 percent in a week through May 29. It’s up almost 3 percent year to date and yields 6 percent over the past year.

The SPDR Barclays High Yield Bond Fund, has had similar troubles, losing 1 percent in a week. It’s gained 3 percent year to date and yields 6 percent. Keep in mind that these funds will always be subject to amplified volatility, so they should only be small holdings in your income portfolios.

Most bond investors, though, probably sample the broad section of the U.S. bond market through a giant index fund such as the Vanguard Total Bond Market Fund, which yields about 1.6 percent. It’s also feeling the sting of lower prices, though, having lost 0.47 percent in the past week and 0.76 percent year to date.

HOW TO HEDGE BOND MOVEMENTS

Not all bond funds react the same to rate moves. Those with a shorter duration – the amount of money you can lose if interest rates rise one percentage point – will hold their value better than long-maturity (20 years or more) or junk bond funds. The iShares 1-3 Year Credit Bond ETF, which holds short-term corporate debt, lost only 0.05 percent in the past week and is up 0.47 percent year to date. With this lower risk profile, though, comes a much lower yield of 1.5 percent.

There are a bevy of alternative vehicles that can help you hedge bond price surges. I’ve always liked I Savings Bonds, which are linked to the consumer price index. If inflation comes back, you will earn the current Treasury yield plus a bonus rate pegged to the U.S. cost of living. You can buy them for as little as $25 commission-free through Treasurydirect.gov. Interest is compounded semi-annually for up to 30 years.

If you’re working with a trusted adviser or want to do something daring, you can employ a hedging strategy using inverse ETFs. The prices on these vehicles rise when bond prices fall.

You can “short” nearly any kind of bond. For example, let’s say you owned long-maturity government bonds and wanted to protect yourself. You could buy an ETF such as the ProShares 20+ Treasury ETF, which was up about 1 percent in the past week and gained 3 percent year to date.

Just keep in mind that these vehicles are more volatile than junk-bond funds when rates are low or falling. The ProShares fund has lost an average 12 percent over the past three years.

The simplest approach, though, is to buy a diversified portfolio of the highest-rated individual Treasury, corporate or municipal bonds through a deep-discount broker. When yields rise, find the bonds with the best coupons and hold them to maturity.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Editing by Lauren Young and Andre Grenon)

Money certainly isn’t gushing into stock mutual funds, even though the Dow Jones industrial average and the Standard & Poor’s 500 Index have hit a series of record highs.

Between April 24 and May 1, investors pulled more than $4 billion out of U.S. equities while pumping almost $1 billion into bonds, according to the Investment Company Institute, the trade group for mutual funds, exchange-traded funds and other U.S. investment companies. The following week, more than $7.3 billion was invested in bond funds, compared with only $363 million in U.S. stocks.

Tracey Ryniec, stock strategist at Zacks Investment Research, says “even professional managers are skeptical. The ‘great rotation’ (from bonds into stocks) never really happened.”

Yet optimism continues to emanate from analysts, especially those like Ryniec who don’t think the market is overpriced.

Ryniec sees skepticism as a bullish indicator for stocks, mostly because stock valuations don’t seem to be excessive. With stocks trading around 15 times earnings, they have a ways to go before they hit her “danger zone” in the 20s and above.

“The overall market is attractively priced,” Ryniec says.

Seth Masters, chief investment officer of Bernstein Global Wealth Management, sees the Dow at 20,000 within five years (it’s around 15,400 now). He initially made that forecast last July.

Masters says stocks are still reasonably priced because S&P 500 companies have low debt-equity ratios and improving economic prospects will continue to boost earnings. Most of the investors who are still pouring money into low-yielding bonds are “paying for the privilege of safety,” as he points out.

“Stocks are not that risky right now,” Masters says, noting that volatility is at normal levels. “They’ve been remarkably well behaved over the past year.”

POSITIVE SIGNS FOR STOCKS

It’s always difficult to gauge market sentiment going forward, but consider these five trends if you want to gain some perspective:

* Euro-zone debt woes have managed to stay off the front business pages of late. While it’s hard to make a case that austerity measures are easing unemployment in the hardest-hit countries – the opposite appears to be true – it’s less likely that the euro zone will collapse. On Monday and Tuesday, central bankers from around the globe gave statements that they will continue stimulative economic policies.

* Japanese stocks, the Charlie Browns of international equities, are poised to rally further as the country’s central bank pursues a weak-yen policy. The Nikkei average hit a 5-1/2 year high on May 20 as Japan’s economy appeared to be rebounding.

* Gold prices continue to decline. The precious metal has traditionally moved in the opposite direction of stock averages. Gold is down more than 17 percent this year as widespread pessimism about the U.S. economy has abated.

* Washington’s debt battles have eased. Sequestered budget cuts, combined with economic revival, have pared the U.S. federal deficit. The Congressional Budget Office reported last week that U.S. borrowing will stabilize over the next decade, alleviating some fears that the national debt will overwhelm the government, which received $1.6 trillion in tax receipts in the first four months of the year – a record high for that period.

* Consumer sentiment is strong and cash registers are ringing. A survey by Thomson Reuters/University of Michigan showed that consumer sentiment was at its highest level in nearly six years in early May. That’s good for retailers, producers of durable and discretionary goods, technology, utilities and energy companies. Another indicator – the U.S. consumer confidence index – climbed in May to the highest level in more than five years, according to the Conference Board, a private research group.

Keeping your skepticism close at hand isn’t a bad idea, but tilting too far in one direction away from your portfolio objectives can hurt you.

I won’t discount the fact that there are still wild cards out there and they may come from Europe, China or the Middle East. The Federal Reserve will eventually back off its easing and cheap money policies, which could trigger a rise in interest rates. That will punish bond fund holders.

In the interim, if you can handle the risk, it makes little sense to “fight the Fed” and avoid stocks.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see)

(Follow us @ReutersMoney or here; Editing by Lauren Young and Jan Paschal)

Money certainly isn’t gushing into stock mutual funds, even
though the Dow Jones industrial average and the Standard
& Poor’s 500 Index have hit a series of record highs.

Between April 24 and May 1, investors pulled more than $4
billion out of U.S. equities while pumping almost $1 billion
into bonds, according to the Investment Company Institute, the
trade group for mutual funds, exchange-traded funds and other
U.S. investment companies. The following week, more than $7.3
billion was invested in bond funds, compared with only $363
million in U.S. stocks.

Tracey Ryniec, stock strategist at Zacks Investment
Research, says “even professional managers are skeptical. The
‘great rotation’ (from bonds into stocks) never really
happened.”

Yet optimism continues to emanate from analysts, especially
those like Ryniec who don’t think the market is overpriced.

Ryniec sees skepticism as a bullish indicator for stocks,
mostly because stock valuations don’t seem to be excessive. With
stocks trading around 15 times earnings, they have a ways to go
before they hit her “danger zone” in the 20s and above.

“The overall market is attractively priced,” Ryniec says.

Seth Masters, chief investment officer of Bernstein Global
Wealth Management, sees the Dow at 20,000 within five years
(it’s around 15,400 now). He initially made that forecast last
July.

Masters says stocks are still reasonably priced because S&P
500 companies have low debt-equity ratios and improving economic
prospects will continue to boost earnings. Most of the investors
who are still pouring money into low-yielding bonds are “paying
for the privilege of safety,” as he points out.

“Stocks are not that risky right now,” Masters says, noting
that volatility is at normal levels. “They’ve been remarkably
well behaved over the past year.”

POSITIVE SIGNS FOR STOCKS

It’s always difficult to gauge market sentiment going
forward, but consider these five trends if you want to gain some
perspective:

* Euro-zone debt woes have managed to stay off the front
business pages of late. While it’s hard to make a case that
austerity measures are easing unemployment in the hardest-hit
countries – the opposite appears to be true – it’s less likely
that the euro zone will collapse. On Monday and Tuesday, central
bankers from around the globe gave statements that they will
continue stimulative economic policies.

* Japanese stocks, the Charlie Browns of international
equities, are poised to rally further as the country’s central
bank pursues a weak-yen policy. The Nikkei average hit a
5-1/2 year high on May 20 as Japan’s economy appeared to be
rebounding.

* Gold prices continue to decline. The precious metal has
traditionally moved in the opposite direction of stock averages.
Gold is down more than 17 percent this year as widespread
pessimism about the U.S. economy has abated.

* Washington’s debt battles have eased. Sequestered budget
cuts, combined with economic revival, have pared the U.S.
federal deficit. The Congressional Budget Office reported last
week that U.S. borrowing will stabilize over the next decade,
alleviating some fears that the national debt will overwhelm the
government, which received $1.6 trillion in tax receipts in the
first four months of the year – a record high for that period.

* Consumer sentiment is strong and cash registers are
ringing. A survey by Thomson Reuters/University of Michigan
showed that consumer sentiment was at its highest level in
nearly six years in early May. That’s good for retailers,
producers of durable and discretionary goods, technology,
utilities and energy companies. Another indicator – the U.S.
consumer confidence index – climbed in May to the highest level
in more than five years, according to the Conference Board, a
private research group.

Keeping your skepticism close at hand isn’t a bad idea, but
tilting too far in one direction away from your portfolio
objectives can hurt you.

I won’t discount the fact that there are still wild cards
out there and they may come from Europe, China or the Middle
East. The Federal Reserve will eventually back off its easing
and cheap money policies, which could trigger a rise in interest
rates. That will punish bond fund holders.

In the interim, if you can handle the risk, it makes little
sense to “fight the Fed” and avoid stocks.

With most large corporations swimming in cash as the economy and earnings improve, adopting a dividend-centric strategy looks even more promising for moderate-risk investors.

Dividends, the portion of earnings that corporations pass along to shareholders in the form of quarterly payments, are becoming more generous. Not only do they reward long-term shareholders with higher total return, they are proven inflation hedges.

At the end of last year, the number of companies paying a dividend hit a new, 13-year high, FactSet reports. And while dividend payout ratios are close to their median level, they are at their highest level since the recession hit in 2007.

The current yield of S&P 500 stocks is around 2 percent, which beats most insured savings accounts. Unless a slowdown triggers earnings declines, the dividend surge is expected to continue.

That’s because the most profitable corporations are hoarding cash that could be channeled into dividends. Last year, companies increased their reserves to $1.45 trillion, according to Moody’s Investor Services, up from $1.3 trillion in 2011.

While profits can also be used to buy back shares or be invested in research and development – as many companies are doing – they are increasingly redirected into dividend payments.

Here are three reasons why dividend-seekers will be rewarded.

HOARDING CASH

Companies hoarding piles of cash may not have the biggest incentives to pay dividends, but they are facing intense pressure to raise their payouts as shareholders get active. Apple, sitting on nearly $138 billion in cash at the end of last year, bowed to shareholder demands to share its pile of money.

All told, Moody’s estimates, technology companies have more than a half-trillion dollars in cash on hand. “The sector with the most cash and reasonably low yields and payouts is technology,” said Bob Doll, chief equity strategist for Nuveen Investments. “I would expect the biggest increases there.”

There’s a broad selection of tech high-yielders, including Intel at 3.7 percent.

PAYOUT RATIOS CLIMBING

Investors are seeing a cyclical increase in the amount of earnings that flow back into dividends. That payout ratio is important to watch because it shows the percentage of profits turned into dividend payments.

Higher ratios are usually better for shareholders. The average payout ratio for the S&P 500 companies ranged between 40 percent to 50 percent from 1981 through 2000, according to research from Scottrade, the discount brokerage.

After the dot-com bust and again immediately following the 2008 crash, though, companies got more conservative with their cash management. At the end of 2011, the payout ratio was at 28 percent. By the close of 2012, it rose to 30 percent.

Analysts like Doll expect ratios will “drift into the 40s over the next couple of years as dividend increases exceed earnings increases.” Ultimately, the companies with the best cash flow and earnings reports will lead the pack.

CASH CONSISTENCY COUNTS

The conventional wisdom has always been that companies choosing to re-invest their cash in their businesses have greater growth prospects – that’s not always the case. The two recessions and stock-market downturns during the past dozen years have made companies much more efficient. Relying more on technology, they have downsized their workforces. Although that is a sour story for employment, it’s freed up more cash.

Some top dividend yielders include Pitney Bowes, which pays a 5 percent dividend; Altria Group, at 4.8 percent; and Entergy at 4.9 percent.

Companies building up their businesses while boosting cash flow increasingly reward shareholders with higher dividends. The telecommunications sector, for example, fed by the steady growth in mobile devices, pays the highest dividends among S&P 500 companies, according to FactSet Dividend Quarterly.

Telecom companies pay an average 4.4 percent yield, compared to 2 percent for the S&P 500. Along with tech companies, they are in the best position to grow their dividends. Verizon, yielding nearly 4 percent and AT&T, at almost 5 percent, are good examples.

BEST DIVIDEND STRATEGIES

You don’t have to buy single stocks to grab decent yielders. Exchange-traded and mutual funds offer diversified portfolios of the best performers.

My best candidate is the Vanguard Dividend Growth fund which owns 147 dividend “achievers” that are expected to raise their dividends. It is up 26 percent for the year through May 22 and 16 percent year to date.

Another worthy alternative is the SPDR S&P Dividend ETF which is up 32 percent for the year and 20 percent year to date.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here; Editing by Lauren Young and Tim Dobbyn)

By John Wasik

CHICAGO, May 24(Reuters) – The golden days of summer might
also brighten the portfolios of dividend lovers.

With most large corporations swimming in cash as the economy
and earnings improve, adopting a dividend-centric strategy looks
even more promising for moderate-risk investors.

Dividends, the portion of earnings that corporations pass
along to shareholders in the form of quarterly payments, are
becoming more generous. Not only do they reward long-term
shareholders with higher total return, they are proven inflation
hedges.

At the end of last year, the number of companies paying a
dividend hit a new, 13-year high, FactSet reports. And
while dividend payout ratios are close to their median level,
they are at their highest level since the recession hit in 2007.

The current yield of S&P 500 stocks is around 2 percent,
which beats most insured savings accounts. Unless a slowdown
triggers earnings declines, the dividend surge is expected to
continue.

That’s because the most profitable corporations are hoarding
cash that could be channeled into dividends. Last year,
companies increased their reserves to $1.45 trillion, according
to Moody’s Investor Services, up from $1.3 trillion in
2011.

While profits can also be used to buy back shares or be
invested in research and development – as many companies are
doing – they are increasingly redirected into dividend payments.

Here are three reasons why dividend-seekers will be
rewarded.

HOARDING CASH

Companies hoarding piles of cash may not have the biggest
incentives to pay dividends, but they are facing intense
pressure to raise their payouts as shareholders get active.
Apple, sitting on nearly $138 billion in cash at the
end of last year, bowed to shareholder demands to share its pile
of money.

All told, Moody’s estimates, technology companies have more
than a half-trillion dollars in cash on hand. “The sector with
the most cash and reasonably low yields and payouts is
technology,” said Bob Doll, chief equity strategist for Nuveen
Investments. “I would expect the biggest increases there.”

There’s a broad selection of tech high-yielders, including
Intel at 3.7 percent.

PAYOUT RATIOS CLIMBING

Investors are seeing a cyclical increase in the amount of
earnings that flow back into dividends. That payout ratio is
important to watch because it shows the percentage of profits
turned into dividend payments.

Higher ratios are usually better for shareholders. The
average payout ratio for the S&P 500 companies ranged between 40
percent to 50 percent from 1981 through 2000, according to
research from Scottrade, the discount brokerage.

After the dot-com bust and again immediately following the
2008 crash, though, companies got more conservative with their
cash management. At the end of 2011, the payout ratio was at 28
percent. By the close of 2012, it rose to 30 percent.

Analysts like Doll expect ratios will “drift into the 40s
over the next couple of years as dividend increases exceed
earnings increases.” Ultimately, the companies with the best
cash flow and earnings reports will lead the pack.

CASH CONSISTENCY COUNTS

The conventional wisdom has always been that companies
choosing to re-invest their cash in their businesses have
greater growth prospects – that’s not always the case. The two
recessions and stock-market downturns during the past dozen
years have made companies much more efficient. Relying more on
technology, they have downsized their workforces. Although that
is a sour story for employment, it’s freed up more cash.

Some top dividend yielders include Pitney Bowes,
which pays a 5 percent dividend; Altria Group, at 4.8
percent; and Entergy at 4.9 percent.

Companies building up their businesses while boosting cash
flow increasingly reward shareholders with higher dividends. The
telecommunications sector, for example, fed by the steady growth
in mobile devices, pays the highest dividends among S&P 500
companies, according to FactSet Dividend Quarterly.

Telecom companies pay an average 4.4 percent yield, compared
to 2 percent for the S&P 500. Along with tech companies, they
are in the best position to grow their dividends. Verizon
, yielding nearly 4 percent and AT&T, at almost 5
percent, are good examples.

BEST DIVIDEND STRATEGIES

You don’t have to buy single stocks to grab decent yielders.
Exchange-traded and mutual funds offer diversified portfolios of
the best performers.

My best candidate is the Vanguard Dividend Growth fund
which owns 147 dividend “achievers” that are expected to
raise their dividends. It is up 26 percent for the year through
May 22 and 16 percent year to date.

Another worthy alternative is the SPDR S&P Dividend ETF
which is up 32 percent for the year and 20 percent year to date.