The gloomy doomspeak on Wall Street has lightened up. Oil prices are falling and consumer confidence is growing again. The corporate earnings look good and the stock market is watching indexes move higher. Some wise heads are warning that too much exuberance may be a risky thing however. While the economic picture looks considerably brighter there are still the issues of a cooling housing market, rate hikes by the Fed, and uncertain inflation numbers. While the economy is gaining a new momentum there are already voices warning of what they call the classic warning signs of an economic slowdown. Rising interest rates always mean higher credit card debt and less opportunity for cash out mortgage refinance deals. When investors get such strong but mixed signals, the wise thing to do is look for stocks that do not depend on a booming economy or a surging stock market. Look for moderate P/E stocks that benefit from rising commodity prices or changes in law such as the repeal of the Public Utilities Holding Company Act.
The questions investors need to ask may not have solid answers but the issues they address will be affecting the market for the foreseeable future. The key questions analysts are looking at are:
Ã¢Â?Â¢ Whither Energy? In plain terms is the price spike in oil over with? The average price for gasoline is down approximately a dollar a gallon from its high in September of 2005 but some analysts warn this could just be a temporary reprieve.
Ã¢Â?Â¢ Has Housing Crashed? Looking at the climbing interest rates and the slowing of the housing gains is putting a crimp in the cash out mortgage refinance movement. That means there is far less money to fuel consumer spending.
Ã¢Â?Â¢ Will Trade Deficits continue their growth spurt driving increased Federal Reserve Rate Hikes?
Ã¢Â?Â¢ Will falling unemployment which drives higher labor costs, (leading to inflation and increased Federal interest rates) continue to fall?
Ã¢Â?Â¢ What is really happening in the Mid East, particularly Iraq and Iran? If civil war in Iraq deepens and if Iran continues its nuclear push involving Europe and the rest of the Mid East in a hot war the prospect of rocketing oil prices climbing above $100. a barrel becomes much more likely.
Ã¢Â?Â¢ What Energy Investments are the most stable? While oil may not look good there are other energy investments that do look good, it just takes a little sleuthing to find them.
Elizabeth Frengel points out in an article for Kiplinger that when an economic recovery starts rolling the growth stocks pay big. She notes that the growing economy changes that picture so that “as the economy gains steam, the focus inevitably returns to dividend payersÃ¢Â?Â¦.” Looking at companies that have more solemn business models may seem boring, but dividend paying companies tend to handle their books differently and may be less volatile that stocks that do not pay dividends. “It’s the extremes that you want to avoid” says Frengel. So while an investor is looking at the economic recovery they need to focus on security as well as growth. (Frengel, E., 2005, How to Pick Stocks That Keep Paying, Kiplinger.com, retrieved 2/2/06 from http://www.kiplinger.com/personalfinance/ ).
This is not a time for breathless exuberance. The stocks we recommend are strong, steady performers plus some solid companies with reliable dividends that may not be particularly high yielding but are reasonably priced and financially strong. Financial strategists suggest dividend paying stocks with stable earnings and squeaky clean balance sheets for optimum financial health. The constant reinvestment of dividends is the major component of steadily and reliably growing wealth.
1. Archer Daniels Midland (ADM) Is one of those stocks that has quiet staying power, plus it is the largest producer of ethanol in the United States. This places them squarely in the energy growth field without the uncertainty attached to oil. The recently passed energy bill gives refiners a 51 cent per gallon subsidy for each gallon of ethanol they use in their blends and imposes a progressive minimum renewable fuel usage requirement for refiners. This puts ADM in position to see as much as 33% earning in the coming year. Archer Daniels Midland is primarily in the commodities business which is traditionally difficult; but the mix of bio-diesel, ethanol, oils from corn, soybeans, rapeseed and sunflowers as well as the traditional food commodities have made this a stable and attractive investment.
2. Eli Lilly (LLY) is a company that thrives when the services sector for health care thrives and as the price for services in medical care skyrocket Eli Lilly profits. Eli Lilly puts a higher percentage of annual sales money back into Research and Development than other pharmaceutical companies and it shows. They invest their cash into what is called “future growth” and have an impressive array of new drugs in their discovery program that are projected to be big winners. Analysts predict profits to reach above 10% with stock yields topping 3% which is sweetly above the industry average of 1.7%.
3. Kinder Morgan (KMI) is one of those companies whose value is tied to the importance of energy without being affected by the short term seizures of the commodity prices. It really doesn’t matter much if the short term price of crude oil bounces up or down $30 a barrel the stuff still needs to be transported. That’s where Kinder Morgan enters the picture as the largest independent oil pipeline company in the U.S. they are relatively untouchable as long as the cost of potential entry (due to construction costs) remains high. Kinder Morgan recently acquired Terasen (Canada) which is projected to raise earnings over the coming year. Announcements of plans to raise the dividend to $3.50 (a 3.8%yeild) has cheered shareholders. A little clue for the future is in the relationship of the CEO to the health of the dividend payouts. The CEO owns a husky 20% of the shares of stock but only receives a one dollar a year salary. That should keep him totally committed to returning those sweet cash dividends to the shareholders.
4. Meredith Corp (MDP) An old fashioned paper and ink publisher Meredith Corp. is 104 years old and publishes such popular and respected magazines as “Better Homes and Gardens, Ladies’ Home Journal, and Traditional Home”. The company recently added several more respected and well read titles with the acquisition of Family Circle, Parents, and Child Magazine. Meredith Corp also publishes Siempre Mujer, a Spanish language magazine, and owns web sites, book publishing and 14 television stations. The rising cost of doing business (postage and paper costs) is offset by the balance in the portfolio of assets. Meredith pays a dividend every year as it has done faithfully for the past nearly 60 years. It has raised its dividend every year for the past twelve years. The company may not be turning heads with fireworks but it is a stable company paying reliable dividends and firmly entrenched in the traditions of Middle America.
When doing your home work before choosing stocks remember that dividends get favorable tax treatment. While the IRS clips you at a rate of 35% for ordinary income the taxes on qualified dividends are a maximum of 15%.
It pays to remind potential investors that the constant reinvestment of those dividends is what creates growing wealth.
None of the past history related in this article can be construed to promise any future performance and because an analyst likes the look of a stock does not mean it is right for you as the individual investor. Every investor is responsible for assessing their own risk tolerance, mapping their own investment and retirement strategy and understanding the risk/return balance on any stock they choose to buy.