Grantham: High-quality stocks still relatively cheap

It’s always interesting to read Jeremy Grantham’s latest thoughts on the market. In his just published Q4 2009 letter (embedded below) he reiterates his view that the market, as represented by the S&P 500, is worth only 850 and that any advance from current levels will make it “seriously overpriced.”

Still, he says, the high-quality component of the market is still relatively cheap. Presumably this represents the types of stocks that his firm’s portfolio is overweighted in, so out of curiosity I looked around for a list of Grantham’s top portfolio holdings (as of Q3 2009) and came up with names like Abbott Labs (ABT), Johnson & Johnson (JNJ), IBM (IBM), Chevron (CVX), Microsoft (MSFT), Pepsico (PEP), Pfizer (PFE), Wal-Mart Stores (WMT) and so on.

Of course whenever I look at a stock as a potential investment I always have its dividend in mind – not just the dividend yield, but also the company’s record of growing its dividend over time. And in that respect, thirteen of the fifteen stocks listed as Grantham’s top holdings pay a dividend, and many have an excellent record of dividend growth.

That dividend growth could come in handy if Grantham’s prediction – repeated yet again in this letter – of “seven lean years ahead” comes to pass. Grantham’s full comments can be seen below:

GMO January

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