AIA Advocate for Absolute Returns : Economy

Association of Investor Awareness - Week of 05/28/2009

Research & Editorial Staff — Thu, 28 May 2009 14:08:00 GMT

Is The Economy Finally Turning Around?
Companies With Cheap Eats Are Doing Well
China's Economy Is Still Hot (Compared With Everybody Else)
Energy Investments Are Looking Good Again
The Bottom Line This Week

The stock market rally that started on March 9 is proving to have longer legs than even the most optimistic investors dared hope. Through the end of May, the S&P 500 was up 30 percent even though the economy was continuing to decline.

Over the past month, however, the market's performance suggests that the rally may be getting short of breath. Since our last newsletter, the Dow gained an unremarkable 1.1% and the Nasdaq barely rose 0.7%. It remains to be seen if stocks will get a second wind and run for another few laps, of if a correction is on the way.

If history is any guide, the market's next move is more likely to be down than up. Not only is a 30% gain without a break unusual, summers are often slow on Wall Street. To be sure, rallies sometimes come along during the three month period but large surges don't usually arrive until after Labor Day. Shrinks think it has something to do with humans having an innate urge to stock up (pun intended) when cooler days remind them that winter is on the way.

Is The Economy Finally Turning Around?

The biggest stock market engine of all, of course, is the economy which has not been winning any medals of late. In fact, nearly all the leading indicators are still slipping. Housing prices, for example, dropped 19% in the first quarter, and jobs are continuing to disappear. There is a long and dismal list of negatives.

On the other hand, most indices are sliding less quickly than they did a few weeks ago. Optimists see the not-so-bad numbers as proof that the recession is finally coming to an end.

We are inclined to agree with the optimists, but we think a recovery will probably be more modest than they expect. A few problems are headed our way that will probably keep the rebound party from getting too lively.

The first hurdle is a commercial real estate crunch that seems likely to hit later this year. In several cities, a few skyscrapers that were once humming with activity have lost so many tenants their owners can't make the payments. As is true when Ma and Pa Kettle get behind a few months, the former high rollers are also getting the boot. There is so much vacant commercial space available, this market won't turn around anytime soon.

Many once bustling shopping malls are also in trouble. When Joe and Sally MidAmerica got their pink slips, they had a revelation: spend less money. What a concept. The result is lean times for retailers – especially those that sell overpriced glitter goods instead of affordable necessities. One bright spot is consumer confidence is rising.

Manufacturing is in no better shape than retailing. There is a connection between the two that people learn in economics classes at Harvard: if nobody buys stuff, nobody needs to replace it.

However, manufacturing should begin to pick up a bit this fall. The dollar has been dropping in value over the past few weeks which will make U.S. products more competitive overseas. The technology sector is already seeing an increase in foreign orders.

Speaking of Joe and Sally, many recent homebuyers who have been keeping their lenders happy may not be able to do so much longer. The people who are in trouble took out option mortgages that allowed them to pay whatever their incomes could afford for the first few years. The flexible terms were like winning a lottery for home buyers of modest means who realized they could live in a McMansion on a single-wide income.

Now the mortgage grace periods are running out and the option mortgage crowd will need to pay full freight each month. Many of them won't be able to do it, which will put more pressure on the housing industry.

All in all, there don't appear to be any big engines of growth that will do much more than lift the economy off the floor this year. Nevertheless, even modest growth will beat the sinking numbers we have now.

The bottom line is, there is reason for cautious optimism, but celebrate with domestic bubbly.

Companies With Cheap Eats Are Doing Well

Every problem creates opportunities for companies that happen to be in the right business. In the current situation, companies that supply necessities for the least amount of money are in the catbird's seat. Since the economy is likely to remain slow for quite some time, the winning suppliers should continue to prosper.

Leading the list of companies with the right stuff are those that provide inexpensive foods to the countless people who need to watch their pennies.

The fortunate suppliers are led by ConAgra Foods (CAG) that supplies a cornucopia of packaged foods throughout the U.S. http://finance.yahoo.com/q/bc?s=CAG The company's brands include Chef Boyardee, Egg Beaters, Healthy Choice, Hebrew National (great hot dogs), Hunts, Peter Pan, Rosarita, Van Camps, Marie Callenders, Parkay, Wesson, and a host of others. ConAgra also produces many private label foods for large retailers.

ConAgra's stock is beginning to move up as investors see how well it is doing in today's difficult economy. However, the yield is still an attractive 4.1% which indicates the stock is still attractive.

One step down the price ladder – which is an advantage now - is Hormel Foods (HRL). http://finance.yahoo.com/q/bc?s=HRL The company is profiting from booming sales of Spam, Hormel Chili, Dinty Moore Beef Stew, and several shelf-stable microwave foods. To capitalize on its good fortune, the company just converted a new processing plant to turn out the low-cost foods that are in highest demand. Profits rose 4% in the first quarter, which is remarkable in a weak economy with high unemployment.

Our old favorites, Colgate Palmolive (CL) http://finance.yahoo.com/q/bc?s=CL and Procter & Gamble (PG) http://finance.yahoo.com/q/bc?s=PG are also doing well. Both companies provide health, beauty, and homecare products worldwide. The companies are benefiting from the stronger economies that exist in many of its markets.

Colgate Palmolive and Procter & Gamble make a good pair for investors. Although their product lines overlap, Colgate has more low-priced basics that are ideally suited for current economic conditions. Procter & Gamble leans a bit towards higher end products that should have greater appeal as the economic siege lifts later this year.

The five investments we recommended last month are continuing to March forward. Their prices may drop back a bit before they resume course, but long term investors should hold on to them. Here's the scorecard:

China's Economy Is Still Hot (Compared With Everybody Else)

One country that is bucking the global economic recession is China. Although growth has fallen from its recent double digit highs, the country is still chugging along at a respectable 6.1% rate. That's higher than many experts expected since China's export business is linked to the economic health of its customers.

It turns out that the experts were so focused on exports, they underestimated the rapid growth of China's internal market. With at least 1.2 billion people, China can consume much of what it produces itself. That's especially true since the Chinese people have more money to spend than ever before, and they want to live large.

We are particularly bullish on the long-term prospects for China Mobile (CHL). http://finance.yahoo.com/q/pr?s=CHL Cellular service may seem like a luxury that people will drop during an economic slowdown. But that's not the case in China where mobile services are more important than in most countries. In much of China, landline telecom links are frequently of poor quality, and are often not available at all. Consequently, much of the population relies on cellular-based communication and Internet services.

China Mobile now has a staggering 457 million subscribers. That's about 150 million more people than the entire population of the U.S. Nevertheless, the company has yet to capture as much as half of its potential market share.

There's another indication of the continuing economic boom in China...and we're talking about the boom in domestic Chinese travel and tourism that we have observed.

As China transitions from poverty to affluence, an increasing number of the Chinese population are actively looking to enjoy their new-found middle-class status.

And one of the ways they are spending their money is on travel – taking vacations and seeing more of their vast country as well as traveling more on business.

The Great Wall of China remains one of the most popular tourist destinations in the world. Meanwhile, the number of people visiting Taiwan from mainland China has nearly doubled during the past 24 months ... and China's domestic tourism industry has grown 22.6% annually for the past 5 years.

We're certainly bullish on the Chinese travel and tourism market ... and in particular, on one of China's fastest-growing travel services companies... Universal Travel Group.

Universal Travel Group has been trading on the Bulletin Board, but starting Thursday, May 28, it will be trading on the NYSE Amex under the symbol "UTA."

Universal Travel specializes in online and customer representative services. The Company offers packaged tours, air ticketing, hotel reservation and air cargo agency services. They racked up some great numbers from 2005 through 2008: 202% Compound Annual Growth Rate (CAGR) ... they have no long-term debt ... $16.2 million in cash ... $30.2 million in working capital... and earnings of $14.5 million for the full year ending 12/31/08.

By our calculations, they have earned $1.20 ttm, and at a closing price of $7.00 on 5/27/09, they are trading under a 6 P/E multiple. Comparable industry multiples range from 22 to 28...so Universal Travel has a lot of upward potential. Go to http://cnutg.ir.stockpr.com/ for more details.

Energy Investments Are Looking Good Again

The last time we filled up our gas tanks we noticed that our local service station didn't get the word that a recession is in progress. Instead of lowering prices, they went up about 25%. Most energy insiders think the uptrend will continue, especially if the economy improves.

We think the best way to profit from the rebound is with ExxonMobil (XOM), the world's largest energy supplier. http://finance.yahoo.com/q/bc?s=XOM The company produces both oil and natural gas, much of which it turns into petrochemicals, fertilizers, plastics, and other products. ExxonMobil also has interests in electrical plants that are fueled with XOM's energy.

Despite ExxonMobil's leading position in its industry, the stock still carries a low P/E of 9.5. That looks very attractive to us.

The Bottom Line This Week

The economic outlook continues to improve fractionally, which has been fueling the stock market rally. At this point, however, stocks may have gotten ahead of themselves since the economic rebound is unlikely to be strong. As a result, a correction is probably on the way.

Nevertheless, many stocks should do well longer term because they can squeeze profits from a slow economy. Among the fortunate few are ConAgra Foods, Hormel Foods, Colgate Palmolive, and Procter & Gamble. Due to their unique market niches, China Mobile, Universal Travel Group and ExxonMobil should also have prosperous futures.

Association of Investor Awareness - Week of 04/30/2009

Research & Editorial Staff — Thu, 30 Apr 2009 14:20:00 GMT

In This Issue:

Signs Of A Better Economy? (Or At Least Not As Bad?)
Stocks For A Weak Recovery
The Bottom Line This Week

Last month investors received another booster shot from Wall Street as the Dow and the Nasdaq rose an additional 1.2% and 5.5% respectively. The gains left stocks up 26% from the rally's jumping off point. With any luck, and a few encouraging numbers from the economy, the rally could continue for another few weeks.

Lest anyone think the bear is finished, however, we must remind you that the market never moves in a straight line very long. Even if this is the start of a new bull market, we must expect to get some nasty shocks along the way. After such a strong rally, the first correction may be close at hand.

Signs Of A Better Economy? (Or At Least Not As Bad?)

Analysts are all over the map when it comes to predicting the future of the economy. Some see improvements, others think the most we have is a slower decline. A few super bears believe the worst hits are still to come, and they are fastening their safety belts.

Because the economic outlook is the most important issue that investors must deal with right now, we will review the three main arguments for each outlook. Of course, we will finish up by giving you our own sterling opinion.

1) The Economy Is Improving:

The strongest indication that economic relief is on the way is the rising stock market. Although many investors are not particularly well informed about economic matters, it's just the opposite with big spenders – and they are buying stocks. Since the market tends to look ahead from six to nine months, economic relief is probably about that far away.

Consumers are also showing greater confidence in the future by traipsing off to the mall a little more often than they did a few months ago. Since consumers are two thirds of the economy, their improving outlook can be a self-fulfilling prophesy. Spending is still very low, but at least the trend appears to be changing.

Business spending is also on the floor, and it will probably remain there for several months. But with consumers beginning to buy goods again, businesses will need to replace them. Inventories are already low for many products. As with consumers, however, a business turnaround is likely to be modest.

Housing remains weak in most markets, but there are signs of life in others. That's not surprising since home affordability, an established measure of housing trends, is higher than it has been in over five years. Many hopeful homebuyers know that prices could go lower, but they also know they might start to go back up again. As a result, many people who can afford to buy at today's prices are deciding to take the plunge. Lower interest rates are another incentive to buy.

Credit for every type of loan is still tight but the situation isn't as bad as the news stories might have you believe. Throughout America, hundreds of regional banks that didn't follow the subprime path to ruin have money for worthy clients. Lending standards are higher than they were during the boom, but that's a good thing. Only an idiot would want to go back to the loosey goosey standards that brought ruin to our country. The bottom line is, people with good credit histories and a respectable down payment can get mortgages. The same is true for business loans, new car financing, and so on.

Oil prices are remaining low, which is probably doing more for the economy than Washington's bailout program. The drop from almost $150 a barrel to under $50 had the same impact as a huge tax cut. Natural gas prices are also on the floor.

Lastly, the bailouts are helping to stimulate several industries, not just banking. Although we are very concerned about the colossal size of the federal debt, the money is a plus right now.

2) No It Isn't:

Naysayers believe the economy is not improving at all, it is just not dropping as quickly. Although the slowdown may be a technical victory, the bears say there is no way to make "less bad" look like "good."

Pessimists also say that the downward trend could continue and take the economy to the same low place it would have reached at the faster pace. This is known as the "we're dead either way" argument.

Other analysts say that even if the economy stops dropping, that doesn't mean a rebound is anywhere in sight. They point to the Great Depression when growth remained at very low levels for several years. During that time the unemployment rate hit 24% and businesses continued to fail.

3) A Disaster Is On The Way:

The toughest crowd are analysts who are certain that a full-blown depression is coming. They call the new calamity the "Greater Depression" to distinguish it from the not-so-bad Great Depression. Arsenic anyone?

The Armageddon crowd believes that the bailout program won't save the banks because they have been too badly damaged to recover. Instead, the depressionists say, the stimulus money will just put off the inevitable for a few months, and make the collapse all the worse.

The super bears also say the huge federal giveaways are putting so much money into the economy that a period of high inflation –and perhaps hyperinflation- is unavoidable. Therefore, the argument goes, even if the economy starts to pick itself up off the floor, inflation will slam it back down again. The result would be super stagflation, a situation where unemployment remains high at the same time prices soar. It's not a pleasant prospect.

As long-time readers know, we place much more faith on what we actually see happening in the world than what statistics and ivory tower number crunchers say. It's a practice that has kept us in the chips on many occasions when most investors were selling.

For example, we remained bullish on energy efficient industries when oil prices were soaring and most analysts thought modern life was ending. We were of the opinion that railroads, inland shipping companies and other fuel misers would actually benefit from more expensive energy because it would hurt the competition. It turned out that we were right, and our recommendations did well.

Of course, past performance does not guarantee future results, and all that. But for what it is worth, we think the first economic outlook is correct, and the economy is more likely to continue to claw its way out of the hole than it is to begin sinking again. Although a typical recovery seems unlikely, growth should be above the zero mark by the end of the year or by early 2010. If we are correct, many top-quality stocks remain oversold.

Stocks For A Weak Recovery

We hate to repeat ourselves in this newsletter, but on the other hand we never get tired of making money. As a result, we are continuing to recommend the boring multinational stocks that have been doing so well of late. We think their biggest moves are yet to come.

If you only want to make a single blue chip investment, an excellent choice would be the iShares Dow Jones Select Dividend Index (DVY), one of our favorite EFTs. http://finance.yahoo.com/q/bc?s=DVY The index has been performing very well of late. On March 9, DVY closed at $25.91. By April 28, the fund was up to $34.98, a 35% gain. We take back what we said about boring stocks.

We think investors who prefer to buy individual issues should look at three growth companies that should be headed higher.

The first of the three is Alcoa (AA), the giant aluminum producer. http://finance.yahoo.com/q/bc?s=AA Demand for the lightweight metal dropped sharply when the economy fell out of bed and industrial production hit the floor. But even with a small increase in the economy, demand for aluminum should jump smartly.

Deere Company (DE) is another probable winner in an improving economy. http://finance.yahoo.com/q/bc?s=DE The biggest potential for Deere isn't its farm machinery, although sales should improve this year. Instead, demand for the company's construction equipment should begin to rebound as President Obama's infrastructure programs ramp up.

General Electric (GE) http://finance.yahoo.com/q?s=ge should do well as the company continues to get its troubled financial unit back on track. GE's worldwide sales of everything from locomotives to jet engines should also increase. We think this global powerhouse will be a very big long-term winner. A few years from now many investors will wonder how they could have ever thought that GE might not make it through the recession.

Last month we wrote that Ford http://finance.yahoo.com/q?s=F has an excellent "chance for a profitable recovery" and "a small position appears to make sense at today's low price."

That proved to be something of an understatement. When that issue was sent out on March 26, Ford was $2.94. Today Ford closed at $5.45, an 85.4% gain. The worse things get for GM and Chrysler, the better the outlook will be for Ford, the only one of the formerly "big three" automakers that didn't need a bailout. Henry would be pleased.

The Bottom Line This Week

The outlook is improving by inches, but we are a long way from being out of danger. It would not take a very big shock to send the economy and the stock market down again. As a result, we think the best strategy for investors is to use the positive trend we have now and buy blue chip stocks with good outlooks – but protect all your positions with stop-loss orders.

Association of Investor Awareness - Week of 12/18/2008

Research & Editorial Staff — Thu, 18 Dec 2008 16:51:00 GMT

In This Issue:

The Economy Is Bad, But Stocks Are Priced For Worse
Stocks Outshine Their Competition
Behold The Halo Effect
A January Bounce Seems Likely
Energy And Foreign Growth Are Positives
We May Be Halfway Through The Economic Downturn
What Everybody Knows...
The Bottom Line This Week

Last week we received additional signals that a bear rally is probably in the works. During the five day period, investors were treated to a smorgasbord of bad news. Congress turned thumbs down on bailing out the Big Three automakers. Unemployment surged to a 26 year high. T-Bill returns dropped to essentially zero. Many bellwether companies issued earnings warnings. Several firms cut their dividends, and investors were shocked by a $50 billion hedge fund collapse.

So what did the market do? It barely budged. The Dow eased down less than 0.1%. The Nasdaq actually rose 2.1%. The market was also strong during the first three days of the current week. In our opinion, such resilience in the face of disturbing economic events indicates that investors are probably getting ready to do some buying.

The Economy Is Bad, But Stocks Are Priced For Worse

We are not surprised that investors are starting to ignore what would otherwise be solid reasons to sell more stocks. Although the news is troubling, the market appears to be priced for much worse. Since investors always get around to matching values to reality, a partial rebound is likely.

An adjustment also seems to be warranted because more economists are beginning to predict that growth will ease back into positive territory late next year. If the contrary economists are right, the stocks of many high-quality companies are oversold.

Stocks Outshine Their Competition

Stocks don't just look better from a fundamental standpoint. They are also becoming more attractive when compared to other investments. For example, real estate in most regions is likely to decline much further before it turns around. As we said above, T-Bill interest rates are on the floor. And after the Fed's unprecedented rate cut on Tuesday, it won't be long before CD yields also come down.

Some Good Yields Are Still Available

To beat what could be a sharp loss of income we think you should act quickly to lock in the higher rates that are currently available at some banks. At EverBank, for example, rates will be adjusted downwards at the first of the year. However, Domestic Money Market accounts that are opened before December 31 will be "grandfathered" through all of 2009. New accounts start with a 4.01% return for 90 days after which the rate will be 3.42%.

The outlook for commodities is equally grim. One exception is gold. It should do well as inflation begins to replace deflation in a year or two.

That leaves stocks, especially from companies that are well established in global markets, have little debt, and have a good dividend yield. Such stocks are rapidly becoming the only game in town, which is why they are starting to attract more investors.

Behold The Halo Effect

Within the stock market, competition for investment dollars is also keen. Since most sectors don't look very appealing right now, new money coming into the market is likely to pour onto the minority of stocks that do look good. As a result, a rally may have a big impact on favored sectors, and nearly ignore others.

In addition to the multinational blue chips we have been recommending for several weeks, we also think the financial service sector is due for a pop. We've seen it happen on several occasions as the credit crunch set in. Every time it looked as if the sector might someday pull out of its tailspin, investors leaped aboard. For example, Citigroup (C) was just $3.05 in mid November. Now it is $8.23, 170% jump.

For the lowest risks, however, stick with companies that provide needed goods and services to consumers throughout the world.

A January Bounce Seems Likely

As to the timing of a rally, the last week or so of the year is likely to see it start. If so, prices could move up rather quickly because no portfolio manager can afford to miss any gains.

In addition, millions of Americans think that President-elect Obama is putting good teams together to deal with our problems. On Tuesday of this week, even Vice President Dick Cheney expressed his admiration for many of the heavyweights who are being recruited to the new administration. All in all, there appears to be an improving climate for stocks.

Energy And Foreign Growth Are Positives

One of the biggest stimulants at work in the economy isn't coming from Washington. Instead, the return to cheap energy and lower commodity prices is acting like a super tax break throughout the world.

Right now, most of the saved money is being squired away by nervous businesses and consumers. However, at least part of the savings will filter back into the economy as the new year progresses. Cars wear out, refrigerators quit, kids need braces, stores run out of products to sell, and so on. If the funds to fix the problems exist, they will be used.

Another reason the outlook may be better than the headlines today would suggest, is people in most developing countries are still spending money. The BRIC countries (Brazil, Russia, India and China) have over three billion consumers who are determined to maintain their improving lifestyles. The U.S. swims in that sea, and benefits from it.

We May Be Halfway Through The Economic Downturn

There is no doubt that the economic downturn is accelerating. However, even the optimistic economists acknowledge that conditions over the next few months are likely to be worse than they are now.

Fortunately, there is a consolation prize that goes with a severe economic correction: the faster it progresses, the quicker it can eliminate the excesses of the past. That's one of the reasons that the first part of a recovery may occur by the forth quarter of 2009.

The bottom line is, we don't expect an "Armageddon", a "Great Depression II", a "Greater Depression", or a "Very Great Depression" that many gloom and doomers are predicting.

What Everybody Knows...

Lastly on the subject of the economy, we have learned to be cautious when nearly everybody believes something is true. The more experts that climb on the bandwagon, the more likely it is that Mother Market will fool them all.

We don't need to look into the distant past to see how the cognoscenti can totally miss the boat. It was only a few months ago that nearly everyone from Harvard to Meadow Muffin Jr. College was certain that oil would soon be $200. Anyone who disagreed with that view was considered to be an utter fool.

Likewise, nearly every economist was certain that inflation was becoming a problem. Almost no one foresaw the deflationary cycle that began by mid year.

The conclusion to be drawn is not to assume anything is true just because nearly everyone thinks it is. Experts often miss economic calls, and they may be doing it again today.

The Bottom Line This Week

Jim Grant, a knowledgeable chap who writes the biweekly Interest Rate Observer, (www.grantspub.com) recently offered investors some cheer when he talked about several Wall Street legends who stumbled badly, and then recovered.

For example, Benjamin Graham lost over 70% following the crash of 1929. He got nearly everything back by 1936, but he gave about half of it back the next year. However, within a few years he was back on top again, big time.

Graham wasn't just stubborn. He knew that winning is impossible from the sidelines. That's a good lesson for today's investors who may be tempted to stay out of the game that hurt them badly this year.

Notice To Readers

The AIA "Advocate for Absolute Returns" will not be published next week. Publication will resume with our first January 2009 issue.

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.

AIA Advocate for Absolute Returns : Economy

Association of Investor Awareness - Week of 05/28/2009

Is The Economy Finally Turning Around?

Companies With Cheap Eats Are Doing Well

China's Economy Is Still Hot (Compared With Everybody Else)

Energy Investments Are Looking Good Again

The Bottom Line This Week

Association of Investor Awareness - Week of 04/30/2009

Signs Of A Better Economy? (Or At Least Not As Bad?)

Stocks For A Weak Recovery

The Bottom Line This Week

Association of Investor Awareness - Week of 12/18/2008

The Economy Is Bad, But Stocks Are Priced For WorseStocks Outshine Their CompetitionBehold The Halo EffectA January Bounce Seems LikelyEnergy And Foreign Growth Are PositivesWe May Be Halfway Through The Economic DownturnWhat Everybody Knows...The Bottom Line This Week

The Economy Is Bad, But Stocks Are Priced For Worse

Stocks Outshine Their Competition

Some Good Yields Are Still Available

Behold The Halo Effect

A January Bounce Seems Likely

Energy And Foreign Growth Are Positives

We May Be Halfway Through The Economic Downturn

What Everybody Knows...

The Bottom Line This Week

Notice To Readers

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

The Economy Is Bad, But Stocks Are Priced For Worse
Stocks Outshine Their Competition
Behold The Halo Effect
A January Bounce Seems Likely
Energy And Foreign Growth Are Positives
We May Be Halfway Through The Economic Downturn
What Everybody Knows...
The 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