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

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. 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. 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. 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. 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 ...


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Posted 10-29-2009 9:49 AM by Research & Editorial Staff