AIA Advocate for Absolute Returns : Dividends

Association of Investor Awareness - Week of 10/29/2009

Research & Editorial Staff — Thu, 29 Oct 2009 14:49:00 GMT

In This Issue:

Investors Are Deciding Which Way To Jump
Earnings Count More Than The GDP
Beat The Fixed Income Blues
A Dividend Honor Roll
If You Can't Beat Them...
The Bottom Line This Week

The past 30+ days was a weak period for stocks. Since our September newsletter, the Dow fell 0.6% and the Nasdaq dropped 2.3%.

However, investors have little cause to complain. The market delivered a 56% gain since March 9. At this point, a timeout could be a pause that refreshes. That's especially true since October has often been a tough month for stocks, particularly when it was preceded by a run-up. Another such shock was definitely not welcomed.

Investors Are Deciding Which Way To Jump

Of course, we may still have a correction after investors have a chance to consult their crystal balls and compare what they see coming in the economy with current stock values.

Pessimists think the economy won't justify the big gains we have seen so far, much less any additional advances. They point to the World Bank's estimate that the U.S. will grow only about 1.2% next year. If that level proves to be correct, many stocks are undoubtedly overpriced.

More bullish investors think the World Bank has such a poor track record with estimates that it should stop making them. Several economists with much better credentials put growth in the 3% to 4% range for 2010. If that mark proves to be correct, stocks still have some catching up to do.

Earnings Count More Than The GDP

Since we don't buy the market, we are not particularly concerned with what the overall growth rate proves to be, so long as it is above the zero mark. What we care most about are the earnings of companies we are following.

Fortunately, earnings for most of our recommendations are doing very nicely. That's no surprise since we have been favoring blue chip exporters that benefit when the value of the dollar declines.

That was good strategy. So far this year the dollar has dropped about 14% against a basket of foreign currencies, and our exporters are reporting solid sales increases.

The outlook for earnings is actually much better than the dollar's decline would suggest. During the tough recession, most companies cut costs so much that they were able to remain profitable through the worst of the troubles. Now that orders are increasing, nearly every dime is going directly to their bottom lines.

Beat The Fixed Income Blues

As you probably know all too well, the returns from fixed income investments are on the floor. Most money market funds pay under 1%. CDs are paying more, but not by much. Even longer term bonds typically return only about 3.3%. As one retired person we know lamented recently, "Those returns are driving us to the local soup kitchen."

We think the solution for most people who need current income is to move some money to successful stocks that pay attractive dividends. Several of our recommendations fit the bill. Some of them pay about twice what can be earned in the fixed income market.

Of course, there is no sense buying a stock that pays good dividends if it is likely to drop sharply in price. That's a common trap for investors who only look at yields. Since the yield is calculated by dividing the most recent dividend by a stock's current price, the number will soar if the price starts heading for the cellar.

To make matters worse. If the price is tanking, it probably means the company's earnings are also declining. In that case, the dividend will probably be cut. That happened at many of America's largest and most prosperous banks during this tough recession.

The way to minimize your risk is to select stocks that have good yields, and are also doing well in the market. If the companies have long histories of paying dividends, all the better. The cream of the crop raise their dividends every year. Here are three stocks that hit all the bases.

A Dividend Honor Roll

Kinder Morgan Energy Partners, L.P. (KMP) heads the list. http://finance.yahoo.com/q/bc?s=KMP The company owns and operates over 26,000 miles of oil, natural gas, and fuel pipelines in the U.S. In addition, the company has 150 terminals that store and transport petroleum, petrochemicals, coal and other bulk items by rail and truck.

Kinder Morgan also has a timely carbon dioxide business. Huge quantities of the greenhouse gas are now being pumped into older oil wells to increase their yields. Of course, the process also gets rid of the nasty gas. Talk about killing two birds with one stone.

Although Kinder Morgan trades like a stock on the NYSE, it is actually a limited partnership that distributes its available cash to investors each quarter. Over the past five years, the partnership had an attractive 6.5% average yield. Currently, the yield is an exceptional 7.4%. Best of all, only part of the payout is taxable.

When we look at Kinder Morgan's strong business and its excellent dividend, it is easy to see why it resisted the recent stock market sell-off. The company should make an excellent choice for investors who seek high current income plus a chance for long-term capital gains.

Consolidated Edison (ED) is also very attractive. http://finance.yahoo.com/q/bc?s=ED The company supplies electric power, natural gas, and steam to a total of over 4 million customers in New York, Pennsylvania, and New Jersey. The company also sells surplus power to other utilities in the Mid Atlantic region. Additionally, Con Ed designs and installs modern energy-efficient heating, ventilating, air conditioning, and lighting equipment throughout its service area.

There aren't many companies with a longer history of success than Con Ed. It was founded in 1884 after Thomas Edison proved that electric networks were feasible. More importantly to investors who seek income, the company raised its dividends 35 years in a row. That's an outstanding track record. The yield is currently an attractive 5.6%

Eli Lilly (LLY) was founded in 1876, which makes it one of the very few American companies with a longer history than Con Ed. http://finance.yahoo.com/q/bc?s=LLY Lilly has a large line of drugs that treat diabetes, attention-deficit disorder, schizophrenia, osteoporosis, several cancers, and cardiovascular problems – to name only a few. The company also has a full line of successful animal health care products.

Nevertheless, investors are nervous about the company due, in part, to the impact the proposed national health care program may have on drug company profits. Investors are also unhappy that Lilly's patent on Prozac expired a few years ago, and Zyprexa, its best selling drug today, will go off-patent in 2011. However, Lilly has a large drug development pipeline that will bring many new products to market over the next few years.

Eli Lilly currently pays a healthy 6.0% dividend. In addition, the company has declared dividends since 1885, and it has raised them for 42 years. Lilly more than qualifies as one of Standard & Poors' elite Dividend Aristocrats.

If You Can't Beat Them. . .

Speaking of large banks, Goldman Sachs (GS) is emerging from the financial service turmoil in fine shape. http://finance.yahoo.com/q/bc?s=GS Part of the reason is the banking meltdown removed several of its competitors. Now Goldman has a clear shot at rebound profits in many areas.

Goldman also shines because it is an international company that benefits from the expanding global economy that is growing several times faster than the U.S. China, for example, just announced that its growth rate reached an astounding 8.9%. Nearly all of Asia is also rolling along in high gear. As an international bank and trading company, economic growth will mean rising profits for Goldman.

Lastly, Goldman Sachs looks good for the very reason many people hate the company: its political connections are strong. Whatever you may think about that relationship, it should be worth millions of dollars in profits over the next several years.

Earnings are already on an upturn, an excellent achievement given the difficult climate that exists for banks. The yield is only 0.80%, but Goldman Sachs should be purchased for its potential appreciation, not for income.

The Bottom Line This Week

Notwithstanding the last few days, the stock market has continued to rise, but at a far slower rate than it did earlier this year. It does not surprise us to see some correction. Once it runs its course, however, we think the improving economy will justify another leg up for stocks.

A big problem many investors face today is a lack of good income opportunities. Everything from money market funds to long term Treasuries are paying very little.

On the other hand, some high quality stocks have attractive yields. Three that we like very much are Kinder Morgan Energy Partners, L.P., Consolidated Edison, and Eli Lilly.

Investors who have been looking for a promising bank to emerge from the financial service carnage should consider Goldman Sachs. We think the company has a lock on growth.

Until Next Time

The AIA "Advocate For Absolute Returns", a publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next time ...

Association of Investor Awareness - Week of 11/06/2008

Research & Editorial Staff — Thu, 06 Nov 2008 15:55:00 GMT

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.

Week of 08/21/2008

Research & Editorial Staff — Thu, 21 Aug 2008 17:23:00 GMT

In This Issue:

Inflation Spike Seems Unlikely To Last
The Dollar Rally Gathers Strength
Russians In Georgia Have Investors Spooked
The Outlook Is Good For U.S. Defense Companies
In A Low Yield World, Dividends Shine
The Bottom Line This Week

The stock rally lost some ground last week which made many investors worry that the run may be coming to an end. That fear was justified since the main engine behind the rally -falling oil prices- continued to play their part. Even with oil moving down to the $112 range, the Dow fell 0.6% for the week.

Small stocks moved in the opposite direction to their larger cousins as the Nasdaq posted a 1.6% advance. In its own way, the small stock upturn also made investors nervous. The bounce was another in a long list of confusing situations that are at work in the market today.

Some of the fog lifted this week when the Nasdaq got back in step with the Dow. Unfortunately, new concerns about the financial sector pushed the direction down for both of them, which wasn't what investors had hoped to see. By Wednesday afternoon the two indices were off 242.4 points and 63.4 points respectively.

Inflation Spike Seems Unlikely To Last

One reason the summer rally appears to be stumbling is inflation numbers for July were disturbing. The Labor Department said its Producer Price Index rose by 1.2%, more than double the expected rate. It was also the fastest pace we've seen in 27 years.

A second look, however, makes the inflation spike seem less threatening. July was the third month in a row when oil prices made record highs. Under the circumstances, inflation was bound to shoot up. Because energy costs take two or three months to fully impact the economy, we can expect the August inflation rate will also be high.

The good news, of course, is the recent plunge in oil prices should bring inflation back down later this year. We just need to be patient until the lower costs start to give the economy a much-needed boost.

The Dollar Rally Gathers Strength

Another reason the outlook for inflation probably isn't as bad as it appeared to be last month is the U.S. dollar is continuing to rebound. As measured against the euro, the greenback is up 8% since its April 22 low. If the dollar gains additional ground, it will take fewer of them to buy the products we need, and inflation will drop proportionately.

As we said in several recent issues, we think deep-seated problems with U.S. debts, the balance of payments deficit, the housing market, and the economy will start to push the dollar back down a few months from now. Shorter term, however, the greenback should deliver additional profits to aggressive currency investors.

If the dollar rally continues as expected, the PowerShares Dollar Bull (UUP) will reflect the gains. http://finance.yahoo.com/q/pr?s=UUP The ETF mirrors the movements of our currency against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss franc. Taking a broad measure of the dollar's value is a good way to even out the price swings that often occur in the foreign exchange market.

One of the biggest advantages of the dollar ETF is it is easy to buy and to sell. Just as importantly, you can place a stop loss order on the ETF to protect your position. Using a stop will allow you to participate in the dollar rally for as long as it lasts, and be out automatically once it comes to an end.

Russians In Georgia Have Investors Spooked

In addition to the new worries about inflation, investors are also concerned about Russia's decision to leave many soldiers in Georgia. Although it appears the shooting has stopped, the war could start up again overnight.

Strategically, Georgia is of little importance by itself. However, analysts believe that Russia is using the country to send a message to the Ukraine, Poland, and Central Asia to stay in line, or else. Russia wants them to be free of U.S. missiles and to reject making any new military alliances with the West.

Some political analysts believe that Russia's aggressive action in Georgia indicates that a new cold war may be starting. If so, it won't be good for the stock market. However, many defense issues should prosper.

The Outlook Is Good For U.S. Defense Companies

As it turns out, many leading defense companies are attractive whether or not relations with Russia deteriorate. Many billions of dollars worth in military equipment has been trashed by five years in the harsh environments of Iraq and Afghanistan. Replacing it all should keep the defense industry in clover for several years.

Investors who may be interested in taking a diversified position in the defense industry, should consider the Fidelity Select Defense & Aerospace Fund (FSDAX). http://finance.yahoo.com/q/pr?s=FSDAX This no-load fund holds all the major military suppliers in its portfolio including United Technologies, Boeing, Lockheed Martin, General Dynamics, Northrop Grumman, Raytheon, and Rockwell - to name only a few.

Investors who might prefer a more direct defense investment should consider Raytheon (RTN), a major producer of sophisticated command and control electronics, guidance systems, and related equipment. http://finance.yahoo.com/q/pr?s=RTN Raytheon supplies all branches of the U.S. military with systems that are years ahead of what is available elsewhere.

Some readers may worry that the defense industry might only do well if Senator McCain wins the presidency. However, there is little doubt that Senator Obama will also support rebuilding our military. Maintaining a strong national defense is part of both Republican and Democratic platforms.

In A Low Yield World, Dividends Shine

One of the most frustrating problems investors face today is trying to get a decent return on their cash. The outlook for relief anytime soon is poor because the Fed's expected interest rate hikes have been tabled due to the weak economy. We don't expect to see a change in that policy anytime soon.

Meanwhile, several blue chip stocks have declined so much in price that their dividend yields have become quite attractive. Of course, buying high-yielding stocks makes no sense if the company's financials are so weak that the dividends may be cut.

Fortunately, several firms with good yields are likely to hold their dividends steady. A few of them may actually raise their payouts to attract investors. Among the latter, General Electric (GE) looks especially promising. http://finance.yahoo.com/q/pr?s=GE

GE is in the bargain basement primarily because it has a substantial financial service operation that isn't doing well. However, investors are overlooking GE's much larger industrial strengths. The company makes everything from locomotives to wind turbines, all of which are high-margin items that are sold worldwide. Thanks to its industrial operations, the company has an AAA bond rating.

GE is currently paying an attractive 4.20% dividend. Not only is the dividend unlikely to be cut, several analysts think the company may raise it later this year.

As much as we like GE's yield, it is the potential stock appreciation that we find most appealing. Although GE made some mistakes in the past, and is saddled with a financial service operation, the company is a multinational powerhouse. When global economic conditions improve, we think GE will be a top performer.

Another company we like very much is Kraft Foods (KFT), one of the world's leading food and beverage suppliers. http://finance.yahoo.com/q/pr?s=KFT Although the company's 3.30% yield is lower than you can get with GE, the company's position in a defensive industry is appealing. That's one of the reasons that Warren Buffett of Berkshire Hathaway purchased 10% of the company.

Kraft is currently out of favor on Wall Street because the company's profits have been hurt by soaring oil prices that pushed food costs sharply up. However, with energy prices coming down, Kraft's costs should soon begin to drop. In any event, the company is finally starting to pass its higher costs onto consumers.

Thanks to the new policy, Kraft's second quarter profit rose from $707 million to $735 million. With some 80 new products on the way, the company should be on track for another good year.

The Bottom Line This Week

Higher inflation numbers from July, plus the Russia/Georgia conflict, appear to have put the summer rally on hold. However, lower oil prices and a stronger dollar should get it going again. The near term aside, investors with an eye to both dividends and capital appreciation should profit from adding General Electric and Kraft Foods to their portfolios.

Until Next Week

The AIA "Advocate For Absolute Returns", a weekly publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next Thursday...

AIA Advocate for Absolute Returns : Dividends

Association of Investor Awareness - Week of 10/29/2009

Investors Are Deciding Which Way To Jump

Earnings Count More Than The GDP

Beat The Fixed Income Blues

A Dividend Honor Roll

If You Can't Beat Them. . .

The Bottom Line This Week

Until Next Time

Association of Investor Awareness - Week of 11/06/2008

The Rally May Have Legs – Or Not!A Banquet For Value InvestorsDividends Shine In This MarketA Yield Bonus That Few Investors ConsiderThe Bluest Of The Blue ChipsLove Those Dividend AristocratsThe Bottom Line This Week

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

Week of 08/21/2008

In This Issue:

Inflation Spike Seems Unlikely To LastThe Dollar Rally Gathers StrengthRussians In Georgia Have Investors SpookedThe Outlook Is Good For U.S. Defense CompaniesIn A Low Yield World, Dividends ShineThe Bottom Line This Week

Inflation Spike Seems Unlikely To Last

The Dollar Rally Gathers Strength

Russians In Georgia Have Investors Spooked

The Outlook Is Good For U.S. Defense Companies

In A Low Yield World, Dividends Shine

The Bottom Line This Week

Until Next Week

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

Inflation Spike Seems Unlikely To Last
The Dollar Rally Gathers Strength
Russians In Georgia Have Investors Spooked
The Outlook Is Good For U.S. Defense Companies
In A Low Yield World, Dividends Shine
The Bottom Line This Week