Taking Stock: Avoid TIPS, dump Yahoo and pick up Dominion

Dear Mr. Berko: In various columns from several years ago, you recommended Treasury Inflation-Protected Securities. And in the past two years, you haven't written a word about them. Is inflation still a problem? Also, what is your current opinion on Dominion Resources? I would like to buy 150 shares. What do you think of the long-term prospects of this stock -- for 10 to 12 years? In addition, tell me if I should buy 300 more shares of Yahoo, in which I have a 6-point loss, or if I should sell the stock. FL, Durham, N.C. Dear FL: I don't believe inflation is going to be a significant problem in the coming decade. In fact, in the past several months, I've come to believe that deflation may now be a more significant problem. But the reason I've not recommended Treasury Inflation-Protected Securities, or TIPS, is that I don't trust Congress' ever-changing definition of inflation. The most recent glaring example of congressional ineptitude is the exclusion of food and energy prices from the Consumer Price Index (CPI) in the last couple of years. There are other instances of Congress cleverly diddling the facts and calling the new results "core inflation," giving the CPI a healthy-apple image in an attempt to soothe public angst. But food and energy are the meat of this apple, and it's prophetic that Congress is tossing the worthless "core" to the voter. Any fool knows that in the past four years, inflation has been a lot higher than the 2.5 percent that Congress would have us believe. The real number, including food and energy, is closer to 12 percent. TIPS prices do not reflect this truth, which is precisely the reason I have not recommended them. However, that's now moot. If unemployment remains high, as I believe it will, and if unemployment continues higher, as I believe it will, then logic dictates that prices must decline to meet lower demand from an increasing number of consumers who have less in spendable income. But I can unequivocally recommend Dominion Resources (D-$47.23). Dominion sells electrical power to 2.4 million customers in Virginia and parts of North Carolina and sells natural gas to 1.5 million customers in Ohio and West Virginia and to 117 merchant power customers across 14 states. Dominion's assets include 28,000 megawatts of generation; 6,100 miles of electric transmission lines; 57,000 miles of distribution lines; an 11,000-mile natural gas transmission, gathering and storage pipeline; and 22,000 miles of gas distribution lines. Dominion also owns 948 billion cubic feet of storage capacity for natural gas that serves its retail energy customers. The company's $1.97 dividend yields a solid 4.1 percent and since 2006 has grown by 7 percent a year. And many believe the dividend will grow between 5 percent and 7 percent annually in the coming five years. In fact, several market services believe Dominion's dividend could top $2.49 a share as revenues grow from $14.7 billion to $18 billion by 2016. Its business derives from a strong, low-unemployment service area and an economy that serves some of the fastest-growing regions in the eastern United States. Dominion has a good regulatory climate, a good financial statement and skilled management. The company's low payout ratio of 35 percent augurs well for continued dividend growth. Its allowed return on equity is one of the highest in the country, and its gas storage and transmission lines are within hailing distance of the important Marcellus and Lower Huron shale developments. Dominion fits well in most income/growth accounts and has little downside exposure. And if you reinvest the dividends, it should provide an average annual return in the coming decade between 7 percent and 10 percent. I'd be comfortable owning 150 shares. As for Yahoo (YHOO-$15.75): David Einhorn of the Greenlight Captial Hedge Fund recently sold YHOO at a small loss. He believes the company is run by a bunch of "stupids," and I agree. So you should sell your YHOO too. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2011 Creators Syndicate Inc. Published: Mon, Sep 12, 2011