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A Safe Income Alternative?

In this crazy stock market I am not going to advocate investing to anyone, but…..

A couple weeks ago Ray Link made the compelling case for buying dividend stocks.   With the downturn in prices, his case could be stronger than ever right now, and his 80/20 plan is a pretty safe way to approach the market.  Dividend stocks will also help you sleep a bit more soundly in these wild financial times, as their volatility is 1/3rd less than non-dividend stocks.  Another benefit – large companies that pay dividends tend to increase the dividends over time – so your investment has the potential to keep up with inflation. 

If you have a longer time horizon, and only a modicum of faith in many of the biggest corporations in the world, you could make the case for assembling a basket of high dividend stocks from major companies trading fall below their value, as an alternative to buying corporate bonds.   Dividends paid by S&P 500 companies have grown at a compounded rate of 3.2% per year over the last 25 years.   One approach would  be to find stocks of really healthy companies that have a lot of cash, good market prospectus, but are trading at low multiples.

For instance, take a look at the following companies:

  • AT&T (T) is one alternative way to play the success of the Apple iPhone (though it is AT&T’s service that mainly takes the heat).  But the fact remains that this is an American corporate fixture, with a market value of over $150 billion dollars.  The stock recently closed at around $24 a share – a little above its 52 week low.  That puts it with a PE ratio of just over 12 – but the best part – it pays a dividend of 6.92%
  • Kimberly Clark (KMB) is in the unexciting business of paper products, but I bet many of you used Pampers, and Kimberly napkins, towels and paper plates last weekend.  It trades at a little over $60.  It also has a PE ratio of around 13.5, and pays a dividend of 4.3%.
  • Excelon (EXC) is a power company, and we all need power.  It trades at around $38 – midway between its 52 week high and low, with an PE ratio of 9.15 and a great dividend of 5.54%.

In addition, you could look at other high dividend reasonably priced stocks like Eli Lilly (LLY) – PE of 8.6 and pays a 5.8% yield, Pitney Bowes (PBI)- PE of 11.4 and pays a 6.1% yield, McDonalds (MCD) – PE of 15.6 and 3.4% yield, Intel (INTC) – PE of 17.6 and pays a 3% yield, and if you you are so inclined, even a few of the evil corporations like Exxon and Conoco pay well.

All of these companies are financially rock solid, and have a good market prospectus.  If you were to buy five to ten of them with the intention of holding them for a 5-10 year time horizon as an alternative to buying similar time-horizon bonds, you would enjoy equivalent returns via the dividend, but the high probability of a big upside in price.  Sure, there could be a BP Oil in the bunch – but in that case you would not want to hold BP bonds anyway.  It is hard to imagine that companies of this quality will not at least hold their value over 5-10 years.

One caveat….if Congress does not extend the tax cuts this year, dividends will be taxed in 2011 at ordinary income tax rates – as high as 39.6% – which would put a big damper in this plan.

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One Response to A Safe Income Alternative?

  1. Aiko says:

    Thanks for helping me start the dishwasher tonight.

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