High yields Fed ahead

One of the little pieces of dime-store wisdom floating about the investing world of late is “Don’t fight the Fed.”

As I understand it, the basic notion is this: when the Federal Reserve chooses to flood the market with low-cost money – as it did last week with the launching of QE3 – don’t be short the market. All of that cheap money needs some place to go, and a lot of it winds up in equities, driving stock prices higher. Since September 6, the S&P 500 is up nearly 2.5%.

This kind of Fed behavior is thought by some to produce bubbles in certain asset classes, and finding potential bubbles in the larger market is relatively easy. Knowing if and when a bubble might burst…well, that’s a little harder. But one area that looks overinvested is high-dividend stocks – electric utilities, telecom companies, some REITs, etc. By many traditional measures of valuation and earnings, many high yielders are overvalued, but investors seem little troubled. Given the paltry yields on government and corporate debt – even junk bonds – the places to park cash in the expectation of a reasonable return have dwindled. Overvalued or not, the high-dividend stocks still appear to many investors as a good deal.

Take Windstream (WIN). This company is engaged in broadband, voice, and video services to consumers in primarily rural markets. Windstream has a business services division that is trying to get into cloud-based services and so-called managed services, but it’s bread and butter is the shrinking customer base for landline telephones. Though landline telephones are dying a slow death, the service still throws off a lot cash, and this cash flow is the foundation of Windstream’s $1 annual dividend for a whopping yield of around nine to 10 percent.

When he appeared on Jim Cramer’s Mad Money last month, Windstream CEO Jeff Gardner stated that he was “comfortable” with the dividend, suggesting that it could be maintained through 2013. Despite the predictable cheerleading from the company’s CEO, Cramer stopped short of slapping a buy sign on the stock, choosing a wait-and-see approach on the company’s strategy to diversify beyond basic telephone service. Less than two weeks later, MarketWatch.com’s The Tell blog noted another person less than convinced about Windstream. AAII Journal editor Charles Rotblut called the company his “Sell of the Week,” citing “very negative trends” and the possibility of “future write-downs” to goodwill.

Cramer is lukewarm on the stock and another expert calls it the “Sell of the Week” – pretty scary, right?

Since The Tell blog’s piece on Rotblut’s call, Windstream is up 13.5%. Oh well, so much for that.

When people say “Don’t fight the Fed,” a stock like Windstream is a good example of what they’re talking about. With so much cheap money chasing fewer and fewer high-quality ideas, even companies like Windstream benefit from the rising tide. In Windstream’s case, it’s the high dividend that is putting the stock on the radars of a lot of investors.

Disclosure: I currently own Windstream.