My, how times have changed.  I most recently visited Spain in the summer of 2009, and a cup of my beloved café con leche in Madrid’s Plaza Mayor had more than doubled in price when translated into dollars.

Of course, I gladly paid it.  Even at an inflated price, there are few pleasures in life like enjoying a hot café con leche in a Madrid café.

Two years and a sovereign debt crisis later, prices in Madrid’s cafes are a little more reasonable.  But prices in Madrid’s stock market are downright extraordinary.

Consider the broad Ibex 35 Index, which tracks Spain’s blue chip companies.  At time of writing, it trades below the crisis levels of 2008; in fact, the index now sits at levels last seen in 2003.

The index sells for just 9.8 times earnings and yields and eye-popping 8.3 percent in dividends.  Remarkably, this is even cheaper than Greece—despite the now almost certain ejection of Greece from the Eurozone and the havoc that that will wreak.

Value investors have a nasty habit of jumping into investments too early, and I am certainly no exception.  I turned bullish on Spain in the first quarter, buying shares of the iShares MSCI Spain ETF (NYSE: $EWP) in my Tactical ETF Model—and taking substantial losses for it in the months that followed.

Value investors also tend to concentrate too heavily on the fundamentals and valuation of a company while ignoring the larger macro picture.  More often than not, macro concerns prove to be noise.  But during times of extreme stress, they have a way of overpowering company fundamentals.  For example, Spanish telecom giant Telefonica’s (NYSE: $TEF) decision to reduce its 2012 dividend had more to do with conserving capital in a tight credit market than it did the company’s financial health.

Still, today most investors would appear to making the opposite mistake: focusing entirely on macro concerns while completely ignoring the incredible value in front of them.

I’ve recommended Telefonica in recent articles, and I’ll spare readers a lengthy rehash of my reasoning.   I’ll reduce it to five  words: big dividend, emerging market exposure.

The same reasoning applies to banking giant Banco Santander (NYSE:$STD), the largest bank in the Eurozone by market cap.   Santander gets roughly half its profits from the emerging markets of Latin America and another quarter split between the United States and United Kingdom.  Only 13 percent comes from the bank’s home market of Spain.

Santander trades for just 60 percent of book value and its dividend is over 13 percent at current prices.  Could that dividend come under pressure in another wave of capital market volatility?  Of course.  But at current prices, it is worth the risk.

Moving on, investors should consider electric utility Iberdrola SA (Pink:$IBDRY).  Like the other Spanish stocks mentioned, Iberdrola gets only about half of its revenues from Spain.  Roughly a quarter comes from Latin America, and the remainder comes from the United States, United Kingdom, and the rest of Europe.  For a globally-diversified utility, Iberdrola is a steal.  It trades for just 0.62 times book value and 0.64 times sales and yields  6.0 percent.

Disclosures: EWP and TEF are holdings of the Sizemore Capital Tactical ETF Portfolio and Sizemore Investment Letter Portfolio.    

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If Greece has developed something of a bailout culture, it is because there has always been a Western power with a geopolitical interest in bailing the country out.  Whether it was Britain attempting to keep Tsarist Russia in check or the United States looking to best the Soviets in the Cold War, Greece has always had a patron.  By virtue of its strategic location in the Eastern Mediterranean, Greece mattered.

I’ve written favorably about geopolitical forecasting firm Stratfor and its prolific founder, George Friedman.  I wrote reviews of Friedman’s two most recent books (“Book Review: The Next 100 Years“ and “Book Review: The Next Decade“) and continue to recommend both.

Today, I recommend you read Stratfor’s analysis of Greece’s debt woes, which first appeared on Stratfor.com as “Greece’s Continuing Cycle of Debt and Default“:

The ongoing financial crisis in Greece is a familiar situation for Athens. Greece has been in debt since its war for independence from the Ottoman Empire in the 1820s, which means international creditors and foreign sponsors have played a role in Greek finances, politics and economic development since then. Even though Greece has failed to achieve the expected gains from the reforms its Western creditors have demanded it make in order to pay back its loans, foreign powers have always had a strategic need for Greece and have thus refinanced or forgiven its debts despite numerous defaults.

Indebted from the Start

The modern state of Greece was born after 11 years of fighting against the Ottoman Empire (from 1821-1832). However, it was not until Western intervention in 1827 that the conflict turned decidedly in Greece’s favor. The war had disrupted commerce in the Eastern Mediterranean, and France and the United Kingdom were concerned that a power vacuum in the region would give the Russian Empire an opportunity to expand and gain direct access to the Mediterranean. They thus sought to balance any expansion of Russian power by positioning themselves strongly in a newly independent Greek states. When Greece finally achieved its independence, it was these three Great Powers — France, the United Kingdom and Russia — that negotiated the terms of that independence.

Despite the nationalist origins of the Greek conflict, the Treaty of Constantinople — negotiated by the Great Powers in 1832 — declared the Kingdom of Greece an absolute monarchy and appointed a Bavarian prince, Otto, as monarch. Since the 17-year-old Prince Otto was a minor when he was named monarch, a council of regents consisting of three Bavarian advisers who came to be known as the “Troika” — incidentally, the same term used for the International Monetary Fund (IMF), European Central Bank and European Union officials today — were appointed to rule in Otto’s name. One member of the Troika was particularly instrumental in establishing the framework for the new country: former Bavarian Finance Minister Josef Ludwig von Armansperg, who ultimately was appointed prime minister of Greece when Otto assumed the throne.

During the fight against the Ottomans, Greece accumulated a large external debt — a debt on which it defaulted in 1826, greatly restricting the new country’s ability to access international credit. The United Kingdom, France and Russia agreed to loan the new country 600 million francs. As a condition of the loan, the three countries maintained diplomatic representatives in Athens who were heavily involved in the creation and oversight of the Greek government. The Great Powers wanted to see immediate returns on their loans after the new country began taking shape. However, the only immediate source of internal revenue for Greece was agriculture. Loans were given to farmers to expand cultivation on land that was nationalized after the war. The financing terms of the state loans, which required a 3 percent down payment in cash, combined with an immediate and heavy tithe on the lands’ production, forced most agriculture laborers to borrow from the few private individuals who had access to large amounts of capital — mostly the wealthy members of the Greek diaspora and the merchant class. This created a cycle of debt wherein the state’s attempts to pay off its international debt resulted in an increasingly indebted population…

Greece in Modern Times

By the end of World War II, Greece, along with its European sponsors, was in economic ruins. In March 1947, the United Kingdom had to end the financial assistance it had provided Greece in varying degrees since the 1820s. However, the Communist insurgency that engulfed Greece immediately after World War II once again presented the threat of Russia (now the Soviet Union) controlling strategic points in the Eastern Mediterranean. This made Greece strategically critical to the single remaining Western superpower: the United States, whose military and economic aid to Greece during the Cold War prevented Communist forces from gaining influence in the country. In 1981, Greece became the 10th member of the European Economic Community (the predecessor of the European Union). After this, Greece received large loans and subsidies from the European bloc in addition to aid from the United States. Nonetheless, by the early 1990s, Greece’s lack of economic growth and massive budget deficit led the IMF and European Commission to supervise the country’s finances.

A Familiar Position for Athens

Greece’s current problems — a large external debt, high defense expenditures, a political system entrenched by its ability to provide its supporters with continual patronage, a capital-poor and import-dependent economy, an ineffective tax collection system, exclusion from international credit markets and the forfeiture of its fiscal sovereignty to external creditors — are problems Greece has faced throughout its modern existence. It has been in major powers’ strategic interest to ensure Greece’s stability since its independence from the Ottoman Empire, but it seems that nearly 200 years of international interest in developing the Greek economy has not done much to change Greece’s circumstances.

Article by Stratfor.  Full article can be viewed at “Greece’s Continuing Cycle of Debt and Default.”

Some things never change, though Greece’s strategic importance to the West perhaps has.  Greece has far less value as a military, diplomatic, or trading partner than, say, neighboring Turkey.  It will be interesting to see if, for the first time in two centuries of welfare payments, the West finally cuts Greece loose.

How unloved are utilities?

As I wrote in a recent article, they were by far the most shunned sector by the large money managers interviewed by Barron’s (see chart).   Fully 30% of the “Big Money” managers picked utilities as the worst performer of 2012, and barely 3% thought it would be the best.  (On the flip side, more than 30% of the managers chose financials and technology to be the best performing sectors, and technology had not a single manager who voted it worst).

As a contrarian trade alone, utilities would be interesting.  After all, the sector has been known to take investors by surprise; during the 2003-2007 bull market, utilities were one of top-performing sectors on a price basis, and this did not include the high and rising dividends enjoyed by investors during the period.

And this brings me to my primary rationale for liking the sector.  In a world where 2% is a “good” yield on a ten-year bond, the 3.8% paid by the Utilities Select SPDR (NYSE:$XLU) is attractive.  It’s roughly double the dividend yield paid by the S&P 500.  And unlike the interest paid by a bond, the dividends of XLU constituent companies have a history of rising over time.

While portfolio growth is essential to meeting your retirement needs, growth ultimately doesn’t pay the bills; but income does.  Yes, you can sell off appreciated shares to meet current expenses, but that doesn’t work particularly well when the market is trading flat or down.  Just ask investors who needed to sell their shares during the pits of the 2007-2009 bear market and panic.

The problem for most investors is that their traditional sources of stable income—bonds and CDs—simply do not pay enough in this interest rate environment.   This means that finding a respectable current income often means accepting stock market risk.

Frankly, I’m ok with that.  An investor who is comfortable holding a 30 year bond to maturity should equally comfortable holding a solid dividend-paying stock.  If income is your objective, the bends and twists of the stock market can be safely ignored—so long as you are reasonably sure that the dividend is safe.

Utility stocks have a place in a diversified income portfolio, but they are by no means the only game in town.  Select equity REITS are also highly attractive at current yields.  One that I recently added to my Dividend Growth Portfolio is Realty Income Corp (NYSE:$O).  It holds a very conservative portfolio of retail properties  and yields a healthy 4.5.%.

Oil and gas Master Limited Partnerships, and increasingly their general partners, are also attractive options.  Kinder Morgan Inc (NYSE:$KMI) is one that I recently added to my Dividend Growth Portfolio.  It currently yields 3.8%, and I expect the dividend to increase substantially in the years ahead as KMI’s limited partnership, Kinder Morgan Energy Partners (NYSE: $KMR), continues to grow and prosper.

Disclosures: Sizemore Capital holds O, KMI and KMR in client accounts.

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Dick Donahue is the manager and owner of Asset Advisors, LLC and the host of KGMI talk radio’s popular weekend program: Wealth Wake Up with Dick Donahue.

What is perhaps most remarkable about that incident is that there was never a proper explanation for what happened.  High-velocity “algorithmic” trading is generally credited as the culprit, but what exactly happened?  And what is to prevent it from happening again?  To these questions we have no answers.

The real legacy of the Flash Crash is not the portfolio losses suffered by some investors; in fact, unless you happened to have open stop loss orders that got executed, chances are good that the entire event came and went before you had time to act.

No, the real damage was to Wall Street itself, or rather its reputation.  The Flash Crash made investors cynical, making them feel the market was a casino game rigged against them.   Perhaps never again would they believe that the stock exchanges were what they claim to be: a place for holders of capital to allocate it to businesses deemed worthy of investment.

In truth, the market is a rigged game, and it always has been.  Perhaps we need a good Flash Crash every few years to remind us of that.  But rigged game or not, investors able to keep a level head can still use the market for its ostensible purpose of allocating long-term capital.  Market turbulence is something that can be embraced rather than shunned. 

John Templeton

The late Sir John Templeton had a great strategy for managing volatility and taking his emotions out of the equation.  He would make a list of stocks that he would love to own if only they sold for a substantially cheaper price.  He would then place limit orders to buy them at those prices.  If a wave of panic swept the market, Sir John would not be paralyzed by indecision because the decision had already been made for him.

An investor with a plan like this in place on May 6, 2010 could have made a fortune in a matter of minutes.

A similar strategy that had the added benefit of earning you a little extra income is selling deep out-of-the-money puts on stocks you’d like to own at the right price.  Under normal conditions, your puts will expire worthless and you pocket the premium.  But if prices experience a short-term dip, your options might get exercised, meaning that you would have to buy the shares in question.  Of course, that’s the whole idea.  You’d be buying shares of a company you always wanted to own at a price you weren’t expecting to get.

These strategies work fine for buying on the cheap, but what about investors that use stop loss orders for risk management purposes?  I will address that, but first I want to ask a question: would you knowingly play a game of poker if you knew the other players could see your cards?

You most assuredly would not.  But when you place stop loss orders, you have effectively done exactly that.  Don’t be surprised when the stock price dips just low enough to hit your stop before rallying higher.

I’m not suggesting that investors eschew stop losses; good risk management is essential to prevent small losses from becoming catastrophic ones.  But I am suggesting that you play it close to the vest.  Have your stop losses tracked in an Excel spreadsheet, a website not affiliated with your broker, or even a Post-It note.

Warren Buffett

And finally, while automatic techniques like these are valuable tools, they will never fully replace good old fashioned intestinal fortitude.  An oft-quoted line from Warren Buffett is to “be greedy when others are fearful.”

Today, investors are fearful about Europe, which has me feeling more than a little greedy.  I’ve recommended Spanish telecom giant Telefonica (NYSE:$TEF) in these pages before (see “Investing Lessons from Peru”), and I would like to reiterate that recommendation again today.

Telefonica is one of the finest, most globally-diversified telecom firms in operation today, and long after the current crisis has passed it will be routing telephone calls and paying its investors a fat dividend.  Use any turbulence in the months ahead as an opportunity to accumulate more shares.

Disclosure: Telefonica is held by Sizemore Capital clients and is a holding of the Sizemore Investment Letter Portfolio.

The answer might seem obvious at first; all else equal, who wouldn’t take the higher cash payout? But before you answer, take a look at Figure 1.

Figure 1

This chart shows the quarterly dividend of the two companies I mentioned above, both major U.S. retailers.  You will immediately notice that one company, “Company A,” has done a much better job than the other of raising its dividend over the past decade and particularly in the last few years.

Company A is the lower yielding of the two, with a current dividend yield of 2.7%.  But should it continue to raise its dividend in the years ahead, investors would realize a much higher cash payout over time despite the slightly lower yield today.

So, let me ask again, dear reader: Would you prefer to have a stock that pays a 2.7% dividend or one that pays a 3.1% dividend?

I’m sure you know what my answer is, and you probably agree.  You will probably agree even more when you find out what the two companies in question are: Company A is megaretailer Wal-Mart (NYSE:$WMT) and Company B is beleaguered electronics chain Best Buy (NYSE:$BBY).

In my last article, I warned investors not to “chase” high dividend yields.

You have chosen wisely.

And while I would hardly call buying a stock that yields 3.2% “chasing” a high yield, the core lesson is the same.  When building a solid, long-term income portfolio, you cannot make your investment decisions based on current yield alone.  Doing so puts you at multiple risks, all of which can be devastating to you long-term investment goals.

I’ll start with the obvious: business risk.  An exceptionally high current yield often means that investors have sold off the stock or bond due to real, fundamental problems with the business. It also often means that the market is discounting a cut to the dividend.

Does this mean that you should always avoid exceptionally high yielders?

Of course not.  Often times the market overreacts and gives us contrarian value investors fantastic opportunities to be greedy when others are fearful.  You have to look at each case individually and make a judgment call.  To give a recent example, I believe that the potential returns far outweigh the risks in Spanish telecom giant Telefonica (NYSE:$TEF), despite the risks implied by its 11% current yield.  There may be short-term turbulence in Europe, but the company’s long-term future is very bright.

I would be far less enthusiastic about, say, Teekay Tankers (NYSE:$TNK), which yields 9.8%.  The oil tanker business is extremely cyclical and subject to booms and busts.  And given the cut-throat competitiveness of the business, longer-term dividend growth (or even dividend maintenance) is by no means certain.

The second reason to focus on dividend growth is protection from the ravages of inflation.  I have no doubt in my mind that Wal-Mart will continue to prosper. Most of what it sells is merchandise that consumers are unlikely to buy online due to convenience and timing issues.  (On a personal note, most of my Wal-Mart purchases are spontaneous and based on immediate needs.  Where else do you buy a Rubbermaid trashcan, a can of paint, or a case of Dr. Pepper at 3:00 am?)

Wal-Mart’s dividend should easily beat inflation in the years ahead, which is critical for retirees that depend on dividends to meet their current living expenses.

I can’t say the same for Best Buy.  While the company is the last man standing among major big-box electronics chains, it is getting hit from two sides.  Shoppers tend to use the stores as a showroom to try out new electronics before whipping out their smartphones to order them online for far cheaper.  And for larger items no usually purchased online—such as home appliances—Best Buy will continue to see tepid growth for as long as the housing market remains depressed.

Best Buy would not appear to be at risk of failure in the immediate future, but investors searching for steady dividend growth should look elsewhere.

Disclosures: WMT and TEF are holdings in the Sizemore Capital Dividend Growth Portfolio.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”

Find a stock yielding 5% and watch its price get cut in half.

I say this mostly in jest, but this is precisely what happened to investors in RadioShack (NYSE:$RSH), the iconic electronics and gadgets chain still found in most American shopping malls.  At time of writing, RadioShack yields 9.8%, and this is after the company already slashed its dividend.

Given that it is paying out substantially more than it earns, RadioShack will almost certainly further reduce or eliminate its dividend in the coming quarters.  The company barely earns a profit, and it faces a war of attrition it can’t win against larger “big box” rivals like Best Buy (NYSE:$BBY) and Wal-Mart (NYSE:$WMT) and from internet retailers like Amazon (Nasdaq:$AMZN).

In a race with no winners, it will be interesting to watch what falls faster, RadioShack’s price or its dividend.

I’ll quit beating up on RadioShack.  In fact, I wouldn’t be surprised to see the company enjoy a nice rally in the months ahead.  No one can argue that RadioShack is not cheap; the stock trades for 0.67 time book value and a shocking 0.11 times sales.  Almost incredibly the stock currently sells for less than the value of its cash in the bank, $4.97 vs. $5.70.  (Before you value investors start licking your chops, keep in mind that RadioShack has substantial debts against that cash; as of year end, the company had $1.4 billion in debts vs. a little under a billion in cash and receivables.)

The stock could also benefit from a dead-cat bounce.  With the short interest in the stock currently more than seven times the average daily trading volume, it could benefit from a short-covering rally if nothing else.

But that is exactly how investors should view RadioShack—as a potential short-term trade and nothing more.  It should certainly not be considered a long-term income play, as that 9.8% yield can disappear overnight.

This brings me to the point of this article: an investor should never chase a high dividend yield.

Exceptionally high dividend yields generally mean one of two things:

1. The dividend is expected to be the only source of return, and investors should not anticipate much in the way of capital gains.
2. The dividend is at serious risk of getting cut and the market has already priced the stock accordingly.

The first category is not all bad, so long as investors understand this going into the trade.  Many popular investments such as mortgage REITS would fall under this category.  Annaly Capital (NYSE:$NLY) and Chimera Investment Corp (NY6SE:$CIM) both currently yield in excess of 13%.  The dividends are by no means stable, however, and the payout will almost certainly fall when the Fed eventually raises rates.

Tobacco companies have enjoyed phenomenal returns of late and have been the Sizemore Investment Letter’s best-performing investment theme over the past year (see “Tobacco Stocks Still Smokin’”), but they too should be considered zero-capital-gains investments over the longer term. Investors can profit quite handsomely from the reinvestment of dividends and from share buybacks, but this is a sector in long-term terminal decline.

It is the second category where investors tend to get themselves in trouble, both in the stock investing and bond investing.  Alas, your humble correspondent was one of the hapless souls who bought shares of Thornburg Mortgage in 2008 because it had a yield of over 10% and a “solid” portfolio of super-prime jumbo mortgages.  That 10% yield didn’t get me very far when the company filed for bankruptcy. How many other investors were seduced by the 20-30% yields offered on General Motors bonds around that same time?  Again, we know how that worked out.

Investors can avoid these traps by setting reasonable expectations.  If a yield seems too high to be true, it probably is.  Roll up your sleeves, take a look at the company’s financials, and make that judgment call with a sober mind.

Income seekers currently have their pick of the litter of safe, moderately high-yielding stocks with room for dividend growth and price appreciation.  As an asset class, master limited partnerships are attractively priced, and several—including Williams Partners (NYSE:$WPZ) and Kinder Morgan Energy Partners (NYSE:$KMP)—yield over 5%.

REITS are more expensive as an asset class, buy here too there are bargains to be found.  National Retail Properties (NYSE:$NNN) and Realty Income Corp (NYSE:$O) yield 5.7% and 4.5%, respectively, and consider both to be safe.

Investors willing to accept modest risk of a temporary dividend cut should consider Spain’s Telefonica (NYSE:$TEF).  Telefonica currently yields over 10%, and its share price has taken a beating along with the rest of the Spanish stock market.  I consider a dividend cut to be unlikely, though the Board may opt to conserve cash if the European capital markets seize up again.  Still, any cut in this case would be temporary, and I expect the dividend to be substantially higher 3-5 years from now.  Unlike, say, RadioShack, Telefonica has a healthy business with excellent long-term prospects, particularly in Latin America.  Use any weakness as a buying opportunity.

Disclosures: KMP, NNN, O and TEF are all holdings of Sizemore Capital’s Dividend Growth Portfolio.

Dean is a nationally-syndicated radio host and the principal of Barber Financial Group.

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