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You’ve got me beat, Commonwealth Bank

Dividend stocks like Commonwealth Bank and Wesfarmers defy gravity. Are they the next bubble?

As we predicted, the media is falling over themselves in celebrating the S&P/ASX 200‘s (Index: ^AXJO) (ASX: XJO) rise back above 5000.

“ASX cracks 5000, jumps to highest in 4 years” leads The Australian Financial Review.

“The sharemarket’s rally is showing no signs of slowing as investors rush to pour money back into equities” says The Sydney Morning Herald.

Happy Valentine’s Day, ASX

No sign of the rush ending on Valentine’s Day either, the ASX index jumping another 33 points to close at 5037.

The Australian Financial Review took the euphoria one step further, printing a pull-out centrefold titled “The Long Road To Recovery”, plotting the ups and downs of the ASX from 2003 to date.

I’d be tempted to stick it on the wall of the Fool HQ offices if it weren’t for the pictures of George W. Bush, Kevin Rude, Wayne and Julia, and Mario “whatever it takes” Draghi splattered across the centrefold.

Frankly, I can think of better uses for those images… like the dart board, for example.

Speaking of dart boards, any dart-throwing monkey could have seen their blue chip portfolio jump higher in recent times, including yours truly.

Packed with banks, miners and supermarkets, including today’s rocket-launcher, Wesfarmers (ASX: WES), the family portfolio has been on a tear.

I’ve just been sitting back, doing nothing, but enjoying the gains, and preparing for the dividend advices to hit the mailbox.

You’ve got me beat, Commonwealth Bank

With all the sudden euphoria surrounding ASX 5000, investors seem to be forgetting, or more likely ignoring, the Reserve Bank of Australia’s forecast of less than a week ago that economic growth will hold below 3% over the next two years.

We’re an optimistic bunch here at The Motley Fool.

Still, call me Tony Abbott, but I just can’t see how Commonwealth Bank of Australia (ASX: CBA) can significantly grow their already humongous profits, and dividend, when the economy is growing at a relative snail’s pace.

After a 33% jump in its share price over the past 12 months, this same dart-throwing monkey is thinking the downside risks for investors in Commonwealth Bank outweigh the upside potential, and by some considerable distance.

This year’s bubble

For all my optimism, I largely agree with Baillieu Holst partner Richard Morrow who in The Australian Financial Review warned of a “bubble” in yield stocks.

The old saying goes there’s always a bubble somewhere.

Last year’s bubbles were house prices, bonds and gold.

While none of those asset classes are out of the woods, if Mr Morrow is correct, we can add another asset class to the list — high yielding, blue chip stocks, including the banks, Telstra (ASX: TLS) and the supermarkets.

Don’t sell now

Now, I’m not suggesting you go out and sell all your banks, miners and supermarkets, and to be fair to Mr Morrow, nor is he, advising investors “don’t sell too early”.

Judging by the massive increase in Commonwealth Bank’s deposit funding over the last 5 years, including raising $7 billion of customer deposits in the final half of 2012, there is a shed load of cash sitting in bank accounts, earning a relatively low and fast shrinking rate of interest.

We’ve been calling the Death of Term Deposits for a number of months now, saying dividend paying stocks offered an attractive alternative.

Some money has seemingly already made its way to the stock market. But that could be nothing compared to the wall of money that might be looking for a new home if interest rates keep falling.

Remember it was only a few days ago when David Bassanese said in The Australian Financial Review

“…lower official interest rates are not just a possibility but a certainty.”

If that wasn’t bad enough, commenting in the same newspaper on the Commonwealth Bank results, Jonathan Shapiro said…

“Depositors’ attractive rates on their savings could disappear as the big banks lose interest in the deposit war.”

Welcome to the world of the 2% term deposit? I wouldn’t bet against it.

What I am betting against is the share prices of the likes of Commonwealth Bank soaring another 33% over the next 12 months.

I’m with Mark Harrison of Macquarie Funds Management who said in The Australian Financial Review

“…selective companies can get growth and this is where stockpicking is going to be important again.”

I admit I was pleasantly surprised…

Investment Analyst Scott Phillips has just assembled his latest Best Buy Now stocks from the Motley Fool Share Advisor ASX scorecard.

It was only when we got chatting that I realised again that we have some high-quality, fast-growing stocks on our scorecard, several of which have superb business momentum behind them.

With the ASX riding high, I assumed it was going to be tough going to find three stocks to recommend as buys now.

But, to my pleasant surprise, not only could we find three stocks, but between us we assembled a list of six ASX stocks we’d be happy to recommend as a buy today. Scott has whittled the list down to our top three.

Be the Fool, not the fool

Many investors, seeing the growth in the share price of the banks and Wesfarmers will jump in these bandwagons — after many of the gains have already been enjoyed.

They run the risk of ‘buying high’ only to ‘sell low’ if a subsequent fall scares them back out of the market.

Foolish investing offers an alternative — we think a much better way.

We find great businesses with that strong business momentum I mentioned earlier — but importantly with plenty of room to run.

They say ‘trees don’t grow to the sky’ — you try doubling in size when you’ve just earned $3.8 billion in six months, as Commonwealth Bank have just done.

Instead, at Motley Fool Share Advisor we’ve assembled a combination of fast-growing businesses and companies with deeply discounted share prices -– and, even better, a small number that share both characteristics.

That’s how we plan to not only enjoy gains in the coming years, but to beat the market return in the process.

If you are in the market for high yielding ASX shares, click here now to get The Motley Fool’s special FREE report,  “Three Stocks For the Great Dividend Boom”. The report lists the names, stock symbols, and full research for our three favourite income ideas, all completely free!

Until next time, as ever, we wish you happy, and profitable investing.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Motley Fool General Manager Bruce Jackson has an interest in Commonwealth Bank, Wesfarmers and Telstra

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