In This Issue:

The Rally May Have Legs – Or Not!
A Banquet For Value Investors
Dividends Shine In This Market
A Yield Bonus That Few Investors Consider
The Bluest Of The Blue Chips
Love Those Dividend Aristocrats
The Bottom Line This Week

The mid-cycle rebound we have been expecting showed up last week with a spectacular opening. Even though the market on Monday showed a 203 point loss, huge gains over the remaining four days pushed the Dow and the Nasdaq up 11.3% and 10.9% respectively.

This time the gains survived the weekend, but not for long. Monday was a yawn, but the market jumped 305 points on Tuesday as excitement about the presidential election boosted spirits. On Wednesday, however, America suffered a post-election hangover and stocks dropped a whopping 486 points. It looks like Wall Street plans to give President-elect Obama a very short honeymoon.

..."> Association for Investor Awareness - Week of 11/06/2008 - AIA Advocate for Absolute Returns - Investment Strategies, Analysis & Intelligence for Seasoned Investors.
Association for Investor Awareness - Week of 11/06/2008

In This Issue:

The Rally May Have Legs – Or Not!
A Banquet For Value Investors
Dividends Shine In This Market
A Yield Bonus That Few Investors Consider
The Bluest Of The Blue Chips
Love Those Dividend Aristocrats
The Bottom Line This Week

The mid-cycle rebound we have been expecting showed up last week with a spectacular opening. Even though the market on Monday showed a 203 point loss, huge gains over the remaining four days pushed the Dow and the Nasdaq up 11.3% and 10.9% respectively.

This time the gains survived the weekend, but not for long. Monday was a yawn, but the market jumped 305 points on Tuesday as excitement about the presidential election boosted spirits. On Wednesday, however, America suffered a post-election hangover and stocks dropped a whopping 486 points. It looks like Wall Street plans to give President-elect Obama a very short honeymoon.

The Rally May Have Legs – Or Not!

Several analysts who read tea leaves and stock charts are convinced the signs indicate that the rally will run at least through Thanksgiving. The optimistic analysts are joined by many fundamental investors who agree that most stocks are cheaper than they have been since 2002.

We agree with both groups. However, we also continue to think that chasing this rally will prove to be a trap for the unwary. The economy is slipping even further as scared consumers refuse to spend money. Joe & Sally MidAmerica may loosen up a bit during the Holiday Season, but probably not by a lot. Without consumer support, growth can't recover.

Manufacturers, retailers, and even bingo parlors are registering the consumer strike. Automakers are taking such a beating that GM and Chrysler may merge in an effort to survive. Even if they team up, however, the companies may be like two drunks trying to hold each other up.

The good news is that fear may be a stronger emotion than greed, but it doesn't have much staying power. Americans are natural optimists who are not given to remaining down in the dumps very long. It would not take a lot of good news to turn a recession into little more than a period of very weak growth.

For the present, however, good economic news is in short supply. As a result, the stock rebound looks a lot more like a bear rally than it does the start of a new bull market. 

A Banquet For Value Investors

Fortunately, the weak outlook for the economy is of little importance to long-term investors who focus on good stocks that are clearly bargains. In fact, today's lower prices can work very much to an investor's advantage. Not only do low prices boost profits down the road, they also increase the number of stocks from which to choose. The severe stock market downturn is creating a veritable cafeteria of excellent investment opportunities.

Taking a long-term view towards profits further increases your odds for success. Numerous studies show that over the long haul, stocks beat bonds, real estate, precious metals, and most other investments.

Dividends Shine In This Market

One type of stock that looks particularly good for current conditions are those which pay attractive dividends. Unfortunately, many investors dismiss dividends without looking closely at their role in boosting long-term returns. According to John Mauldin, author of the popular book Bull's Eye Investing, dividends account for about 40% of the 10% average annual gains returned by the stock market.

Focusing on dividends has another payoff as well. It automatically puts an investor in the strongest stocks that are most likely to rebound when market conditions improve. In fact, when bear markets finally turn around, value investors often see their dividend portfolios become growth stock portfolios, sometimes overnight.

A Yield Bonus That Few Investors Consider

The best dividend stocks of all are those that increase their payouts every year. Because your cost doesn't go up after you buy such stocks, your effective yield (dividend divided by price) will keep rising over time. After several years, your effective returns can be well above those paid by bonds and other fixed income investments.

A little arithmetic shows how it works. If you buy a $50 stock that pays a $1.50 annual dividend, your starting yield will be 3% - a payout that several oversold blue chips now offer.

If a year or so later the dividend rises to $2.50, your effective yield will be 5%. If the dividend eventually goes up to $4, your effective yield will be $8 - and so on. The effective yield on your $50 purchase can get pretty sweet after a few years. That's why retirees who packed their portfolios with dividend-payers aren't being hurt by the sharp interest rate declines that are hammering many of their contemporaries.

The Bluest Of The Blue Chips

In the difficult economy this year, investors might assume that few stocks qualify for S&P's list of Dividend Aristocrats. Such stocks have increased their payouts for more than 25 years. That's an amazing record since the long time period includes several tough recessions.

In fact, 60 companies are now on the list, of which 39 have already announced dividend increases in 2008. Most of the remaining 21 stocks are expected to qualify before the year ends.

A dividend increase doesn't always indicate that a company is having a good year. Some Dividend Aristocrats will dig deep into their pockets even in a slow economy because they wish to maintain their good standing with investors. This year, several banks are in that group.

However, most dividend divas cut nice checks because they are able to keep money rolling in even when times are tough. Not surprisingly, investors will bid their stock prices up even when everything else is falling.

At the Dividend Growth Investor www.dividendgrowthinvestor.com Dobromin Stoyanov identified the five best performing Aristocrats so far in 2008. They are (with their symbols and percent changes): Family Dollar Stores (FDO, 42.6%), Rohm and Haas Company (ROH, 34.8%), BB&T Corporation (BBT, 21.4%), Anheuser-Busch (BUD, 20.5%), and Wal-Mart (WMT, 19.4%). Two of the five –-Anheuser-Busch and Wal-Mart-- are companies that we have recommended in this newsletter.

Love Those Dividend Aristocrats

At this point, we are more interested in Dividend Aristocrats that have not yet performed well. Such stocks should have some catching up to do when investors decide to revalue them. The following companies in that group look especially attractive to us:

Archer Daniels Midland (ADM) is the Exxon of food, the OPEC of agriculture. http://finance.yahoo.com/q/bc?s=ADM It would be difficult to find a company better suited to succeed in today's hungry world. That doesn't mean the stock won't go down. It's well off its high right now. However, ADM should do very well longer term.

Coca-Cola (KO) may be the most recognized brand in the world. http://finance.yahoo.com/q/bc?s=KO Explorers have reported finding Coca-Cola cans in the villages of "undiscovered" tribes in New Guinea and Borneo. The company also produces juices, energy and sports drinks, teas, coffees, and bottled water – plus sweeteners and fountain syrups for retailers and restaurants. KO has a bright future.

Johnson & Johnson (JNJ) needs little introduction to our readers since we wrote about it recently. http://finance.yahoo.com/q/bc?s=JNJ The company is starting to get more press exposure as a top value stock, and may not remain cheap much longer.

Procter & Gamble (PG) is another of our favorite blue chips that is beginning to get noticed.  http://finance.yahoo.com/q/bc?s=PG The company's products are not exciting but they are used worldwide by millions of increasingly affluent people in developing nations.

Walgreen Company (WAG) is starting to expand into new areas again. http://finance.yahoo.com/q/bc?s=WAG It's expensive to open new stores which hurts profits. But we think the plan will pay off, particularly when the economy begins to pick up.

The Bottom Line This Week

The stock market made some very good gains over the past ten days, which may be the start of something more significant. However, we caution readers that impressive rebounds are common even in the toughest downturns. When the rallies collapse, they do great damage to investors who followed them up.

A better plan is to focus on oversold value stocks. Those that make the S&P list of Dividend Aristocrats have especially good track records for delivering long-term gains.


Disclaimer

Copyright 2010 The Association for Investor Awareness, Inc. All Rights Reserved

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Opinions expressed in these reports may change without prior notice. The Association for Investor Awareness, Inc. (AIA) and respective staffs and associates may or may not have investments in any companies, stocks or funds cited herein, may or may not have long or short positions and/or options and warrants relating thereto and may purchase and/or sell these securities or options at any time in the open market or otherwise without further notice. AIA, its Officers, Directors, Employees and Affiliates may receive compensation for the dissemination of this information.

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Posted 11-06-2008 9:55 AM by Research & Editorial Staff