Value dividend investing refers to value investing in the realm of high paying dividend stocks. Value dividend investing is our top goal.

The problem these days it that dividend stocks are getting lots of love. Dividend stocks are very much in favor with the general market, which means it’s very tough to find value or underpriced/undervalued dividend stocks.

Why are dividend stocks in right now? Well, because dividends offer are viewed as a buffer or protection against stock market losses. This is somewhat of a stupid concept because a 3% dividend yield hardly protects you from a 40% market drop but it’s a common view nonetheless. Moreover, dividend stocks are often more stable, less-cyclical stocks which mean they hold up better than high-flying growth stocks in a bear market. These all contribute to dividend stocks being viewed as “in” right now.

So what are we to do?

Well, the main thing to do is be patient. Now more than ever, patience is very necessary in today’s world of uncertainty and volatility.

As we’ve discussed and will continue to discuss at length on this blog, timing is a HUGE factor in your rate of return in the years ahead. If you allocate a large chunk of cash into a dividend stock at an overvalued price, you might have sub-par returns for a decade. On the flip side, if you buy at severely undervalued levels, you might outperform the market for a decade or two simply on that one transaction.

This means that it is worth waiting. It is worth sitting in cash for prolonged periods of time even when it feels like you’re missing out on a short term rally. Waiting in cash when others chase the market higher is a pillar of value investing, and frankly, is one of the main differentiators between successful value investors and the not-so-successful.

In today’s market, I’m waiting. I’m waiting for more volatility and lower levels. The last dividend stock I move into was Walmart when it dropped below $50. It is documented here.

Today’s world changes rapidly. Stock market moods change from day to day. A company that is dominant struggles to exist just a few years later (see RIMM, NFLX, etc.). Your entry point matters. Your entry point will determine if you are truly a value investor or just another investor chasing the latest hot stock. It’s difficult, requires discipline and more patience that you would ever have thought. But, the returns will be worth it.

Interestingly, Walmart may have hit a turning point as it revealed US same store sales have rebounded and they might report their first quarterly increase in same store sales in a couple years. This is definitely bullish for the stock in the near term. Walmart is a great buy at current levels, but obviously I liked it better around $50 versus $57. Another reason why you have to pounce on Walmart stock when it drops – if you recall, I last bought WMT under $50 in early August. That is GREAT value and is how you have to play this game.

Microsoft recently upped its dividend and has been trading well, although it has mostly been going up and down with the general market which leads me to believe there will be good buying opportunities in the future as the volatility in the market is likely not over.

As I continue to say, wait to buy Philip Morris Int’l (PM) until we get some panic selling based on the news in Europe. No, we haven’t hit it yet despite the constant volatility. There are major challenges in Europe and we haven’t seen it climax until something big happens like Greece bailing on the Euro or even Italy. That is when you want to buy PM. It is coming. Be patient.

Philip Morris Int’l (PM) is one of the stocks that applies especially to this. The reason is that PM is affected big time by Europe. A large percentage of their sales come from Europe. This doesn’t mean the business is at risk, but it will be affected in the near term more by the volatility in the currency markets.

When the Euro drops against the dollar, it is a headwind for PM profitability. This tends to move the stock in tandem with the Euro.

As the European crisis hits a head, the Euro should drop. This is when you want to buy more Philip Morris.

Volatility isn’t going away so be prepared to act when stocks become very cheap.

If we break below 1100, we could definitely see the S&P 500 move towards the 1000 level. A bear market indeed.

Let’s look at some of our dividend stocks we’re watching and how they have performed during this same time.

Walmart (WMT)

As you can see in the above chart, Walmart moved lower from the $54 range down below $50 with the major leg down, but since coming out with its latest quarterly results, it has been bucking the trend of the market and is above $52.  The sub-$50 level was definitely the buying opportunity – we bought more shares of Walmart despite being overweight in this stock at these levels. I won’t add to my Walmart position unless we go below $47-$48.

Microsoft (MSFT)

Microsoft has an interesting chart – the last two months especially.

I initiated my Microsoft (MSFT) position around $24 a share two months ago. In a matter of days the stock was shooting higher hitting the $28 level. Since then, it’s come right back down with the market and is now trading at the levels we bought at.  No worries.

Microsoft is steady and further declines in the market might bring this stock down in order to buy more. I’ll look for more shares in the $20 range.

Philip Morris Int’l (PM)

The Philip Morris chart shows little correlation to the overall market movements. You have to be very patient with this one and I still think a much lower stock price here will be very much connected to peak chaos in Europe both politically and economically. When Europe “blows up” that is when you will want to pounce on some Philip Morris stock.  I think you can easily expect to see this under $60 at some point. I’m waiting it out.

More later on the other stocks and the general market…

The key metric for US sales is the comp stores figure which was flat when factoring in Sam’s Clubs. It was down .9% year over year when just looking at Walmart stores.

Walmart continues to warn that the US consumer is strained – this again is no surprise and will continue. I don’t expect major growth in US sales in the coming years, but I think Walmart will manage the US well while seeing robust growth overseas. It will be enough to deliver nice returns on the stock especially from current levels around $50/share.

Here’s more from Barron’s:

The two names join the Dow Jones U.S. Contrarian Opportunities Index, which is reviewed in January and July.  The latest review adds 64 names and deleted 62.  Here’s how Microsoft qualified: shares have lost 15% of their value over the past decade and are only up about 1% in the past 12 months. But the stock now pays a 2.5% yield and dividends have increased 11% over the past five years. Wal-Mart stock is off 11% in the past 10 years, pays a 2.9% yield and has raised the dividend by 14% in the past five years.

Both stocks look cheap. Walmart is trading at roughly 9.5x estimated earnings for 2011, and Wal-Mart at about 11.2x,  compared to 12.2x for the Standard & Poor’s 500 Index. And both names throw off a decent amount of free cash flow per share, although Microsoft’s expected earnings growth rate of 26% in 2011 is nearly three times that of Wal-Mart’s.

Both of these stocks are definitely in good buy range. I’ve picked up more WMT shares in recent weeks. I’ll add more MSFT if we go under $23.

The good news is that our investment strategy is playing out completely as we have been anticipating. Our patience is paying off.  While the masses were buying up stocks with the Dow over 12,000 and the S&P over 1300, we’re not looking at stocks approximately 15% lower across the board. Nibbling at strong stocks at current levels isn’t a bad idea.

There’s a legitimate chance that we’re in the early phases of a currency crisis which means this is very different from the 2008 stock market crash. This isn’t a liquidity issue, but more a sovereign solvency issue in places like Europe and Japan (and maybe the U.S. to a lesser degree). Owning gold in this situation is crucial as it represents legitimate insurance against the solvency issues and currency issues that are beginning to unfold.

The dow/gold ratio and the S&P 500/ratio is at record lows, now well below the March 2009 lows we saw which marked the nominal bottom in stocks for the 2008/2009 crash. Yes, we’re beneath those lows if you price the market in gold. This is something we’ve been discussing at length – read more on this here.

If you have a very very large chunk of cash, you may want to start nibbling at dividend stocks. Could we go lower? Yes, but I don’t think we hit lows like we did in 2008/early 2009.

Should you sell gold? I don’t think so. I still think the dow/gold ratio approaches 1 or 2. I think there will be major events on the horizon that will decimate confidence and create much more turmoil in the markets. When gold starts jumping $100 in a single day, we’ll know we’re in the final stages of the run and we’ll be on high alert to possibly exit the position and pile that money into very cheap stocks like Walmart, Microsoft, McDonald’s, etc.

Until then, hang on tight and try to remain calm.

Honestly, I’ve been waiting for lower prices in RAVN for a while and we’re getting much closer to them.  Anything under $40 is a buy.

Stocks may do a slight rebound after losing 1000 points in three trading sessions, but I think we could head somewhat lower still in the broad markets. Might be time to start nibbling at these stocks.