Association for Investor Awareness - Week of 02/25/2010

Company Earnings Look Good
Dividends Are Also Increasing
Another Shameless Plug For Dividend Aristocrats
These Winners Remain Attractive...One For 194 Years
Smaller Stocks Are Coming Up Fast
Semiconductors Looking Good Too!
The Bottom Line This Week

Since our last newsletter, the stock market retreated from its earlier highs. That's not surprising since there was cheerless economic news from Europe. The infamous PIGS (Portugal, Italy, Greece, and Spain) are having an embarrassing problem with their colossal debts. Payments are due, but the big spenders are coming up short a trillion dollars or so. The exact number is still in dispute. Whatever it turns out to be will be a shocker.

Investors calmed down a bit when other European countries promised to bail out their spendthrift neighbors. But before anybody could start to buy stocks again, the Fed made a surprise ¼ point increase in the discount rate it charges banks.

The interest rate in question wasn't "the big one" that everybody is most concerned about. However, the change made investors worry that the Fed may be getting ready to raise that one too. Mr. Bernanke swore up and down that he wouldn't risk killing the recovery by committing such a rash act. But just in case he had his fingers crossed, investors moved their chairs a little closer to the door.

After the dust settled, the Dow and the Nasdaq were down 3.2% and 3.5% respectively for the month. As corrections go, it was fairly mild.

Company Earnings Look Good

Over the coming month or so we think the market is more likely to resume its upward course than it is to continue down. The main reason for our cautious optimism is 4th quarter corporate earnings were better than expected. If they remain on an upswing this quarter, investors should revalue the stock market accordingly. We should have a better idea of what's on the way in another week when many analysts will make their preliminary earnings projections.

We already have an indication of what to expect from the retail sector. To the surprise of the prophets of doom, sales increased last month. No one would mistake the uptick for a holiday rush, but it suggests that consumers may be in somewhat better shape than expected.

Of course, shoppers are still telling pollsters that they have little confidence in the future. However, that measure isn't especially reliable in a recession when people are nervous about everything.

Dividends Are Also Increasing

In addition to better earnings, many blue chips are also increasing their dividends, which is always positive for the stock market. We have been expecting it to happen. Most multinational companies are sitting on mountains of cash they were afraid to spend while the recession was raging. Now the corporate Scrooges are being pressured by their investors to share the loot.

Having lots of cash on hand has a longer range benefit as well. Well-heeled companies can finance their own expansion plans without needing to wheedle the money from the tightwad banks. Apparently the latter think the bailout funds should be used for bonuses to reward themselves for all the hard work they are doing on America's behalf. In any event, we expect to see more company mergers and acquisitions as the year progresses.

Another Shameless Plug For Dividend Aristocrats

With dividends on an upswing, this is a good time to remind readers how valuable the payouts can become over time. 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.

The best dividend stocks increase their payouts every year. Because your cost doesn't go up after you buy such stocks, your effective yield (the dividend divided by the price) will keep rising. After a few 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 of our blue chip recommendations offer at present.

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 one of the biggest reasons we think retirement funds should contain a healthy measure of blue chip stocks with good dividend track records.

These Winners Remain Attractive...One For 194 Years

If there was a category for overall stock returns in the Olympics, several of our recommendations would be in the running for a gold medal. All of them pay at least as much as 10 year Treasury bonds, plus they offer great prospects for appreciation.

Heinz (HNZ) needs little introduction to most people. Food stores are packed with the company's condiments, soups, sauces, beans, and other staples. Although the product line is not exciting, the Company's success is another matter. Heinz has paid dividends since 1911 and currently yields 3.7%.

Eli Lilly (LLY) is a well known pharmaceutical company that sells its products worldwide. The stock is currently very attractively priced. Investors are nervous about the pharmaceutical industry because the President's health care plan leaves it in regulatory limbo. Investors are also worried about the President's proposal to tax certain drug profits and offshore accounts.

We think the negatives are overstated. Congress is unlikely to hurt the powerful drug industry that is always so generous at election time. On the contrary, most health care measures benefit the sector. A good example is the Medicare Prescription Benefit Law that once gave Wall Street the fits. Meanwhile, we like the company's long-term outlook and its present 5.7% yield. Incredibly, Eli Lilly has paid a dividend every year since 1885!

York Water (YORW) is a 194 year old company that supplies water to over 176,000 residential and industrial customers in Pennsylvania. Because the Company started when America was still young, it was able to acquire large water resources that are now extremely valuable. Many natural resource experts think clean water will be in greater demand than oil within a few years.

York has paid an annual dividend every year since 1816, which beats Eli Lilly's outstanding track record. York currently pays a 3.7% yield.

Several of our other recommendations pay a bit less than 10 year Treasury bonds. Nevertheless, the stocks are also attractive for long term accounts. The list includes McDonald's (MCD) that is on its 33rd year of dividend payments and currently yields 3.4%. Johnson & Johnson (JNJ) has been sending annual checks to its investors for 47 years and currently yields 3.1%. Coca-Cola (KO) is also at the 47 year mark and is paying 2.9%. Procter & Gamble (PG) has a 53 year track record and yields 2.8%.

Smaller Stocks Are Coming Up Fast

For the past few years, big stocks have been the leaders on Wall Street. That's understandable since investors usually stress safety when the outlook is bumpy.

When the economy starts to improve, however, small stocks begin to move up. That's just what has been happening over the past two weeks. The change is a strong indication that investors are looking past the economy's current troubles to better times ahead.

The most popular stocks are in the technology sector. That's no surprise since tech companies have great potential for growth.

Semiconductors Looking Good Too!

Because semiconductors control countless devices, their makers are having an especially good year. The growth in personal computer sales is nearly double what was forecasted. In addition PCs are using more powerful processors. Ditto for smart phones that do everything from taking pictures to cooking breakfast.

What is surprising about semiconductor companies is their stock prices are still weak even though their earnings are exceeding expectations. That looks like a buying opportunity to us.

Intel (INTC) looks particularly attractive. The Company is best known for its central processors which power most of the world's personal computers. Intel also supplies chips for a wide variety of applications ranging from cellular telephones to the space shuttle. Increasingly, the Company is becoming a leading supplier of communication processors. Despite its recent gains, the stock still appears undervalued. Intel currently yields 3.0%.

The Bottom Line This Week

The economic outlook continues to improve by fits and starts. Well-managed blue chips are already feeling its effects and earnings are on an upturn. Dividend hikes are also in the works. Nevertheless, many stocks remain attractive.

Companies with excellent dividend histories look especially good right now. Standouts include Heinz, Eli Lilly, and York Water. We also recommend McDonald's, Johnson & Johnson, Coca-Cola, and Procter & Gamble.

Smaller stocks are also coming back into favor, especially technology issues. Semiconductor companies look very good right now. In the group, we continue to recommend Intel, the industry leader.

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 02-25-2010 9:38 AM by Research & Editorial Staff