Stanley Black & Decker (SWK) has had an unbelievable rally this year. I initiated a "Buy" rating just six months ago and it is up 20% already. You normally don't expect that from a century-old player operating in a mature market. My excel sheet has been flashing a red signal ever since it hit $165 though, and I finally took some time out to see if it warrants a change in rating. After careful analysis, I must say the risk-reward looks unimpressive at the moment. I am therefore downgrading SWK to "Hold."
The problem of Yield
A cow for her milk, A hen for her eggs, And a stock, by heck, for her dividends. - John Burr Williams
In the search for higher yields, dividend investors have plowed into dividend stocks and pushed their prices to historic highs. If you consider that bonds and stocks compete more directly to gain space in an investor's portfolio, a lower yield vis-a-vis bonds would lower the competitiveness of dividend stocks. This could be an important factor when stocks are either fairly valued or overvalued and the perceived returns from capital gains are lower. As seen in the chart below, SWK's dividend yields are currently at a historic low.
