The One Sure Way to Find a Healthy Company in an Unsafe Market

October 15, 2008

    Amid the relentless barrage of financial news for the past two weeks -- a good portion of it less than pleasant -- you may have missed a critical bit of information from Standard & Poor's.

     That's certainly understandable, as there has been a lot of important developments to keep up with.  But for investors searching for companies that are not only surviving, but actually thriving in this perilous market, S&P's research could well be the Holy Grail.

     But we have to warn you, it's one of those "good news/bad news" things.

     We'll start with the bad news.  S&P found 138 companies weren't as strong as their executives and directors thought.  Their businesses are so besieged and their financial footing is so precarious that these companies -- many of them the blue-chip firms -- were forced to slash their dividends last quarter. 

     In fact, divided cuts increased +557% from last year.

     To make things even more ominous: As the number of dividend cuts rose, the number of dividend increases fell.  Only 346 companies boosted their payouts in the third quarter. That amounts to a -21.2% drop versus year-ago levels.

     The dividend cuts totaled $22.5 billion. That's not a mere paper loss -- that's actual dollars of income that didn't make it into investors' pockets.  This collective dividend axing by U.S. companies was unprecedented.  "It was the worst September for dividends since we started keeping dividend records in 1956," said Howard Silverblatt, a senior analyst at Standard & Poor's.

     Every cloud, however, has a silver lining.  We're reminded of the advice of the noted mathematician Carl Jacobi, who said, "Invert, always invert."

     So what's on the other side of this coin?  Mr. Silverblatt was quick to point it out.  "Given the uncertainty of the markets and the economy, these companies [that are increasing their dividends] have to be extremely confident of their future earnings and cash flow."

     In other words, if the companies cutting their dividends are weaker than even their own executives expected, then it stands to reason the companies increasing their dividends are the strongest, most stable businesses in the country. They can afford to literally give money away.

     Take Magellan Midstream Partners (NYSE: MMP).  It's what's known in the business as an MLP, which is shorthand for "master limited partnership."  These entities typically own energy assets -- such as pipelines and storage terminals -- and they are obligated by law to forward earnings from their business to their partners (in MLP lingo, investors are known as "partners"). 

     In August, Magellan boosted its quarterly dividend from $0.67 to $0.69 per share, and management said its next payment would increase yet again to $0.7025 per share. Bloomberg forecasts a favorable horizon of continually higher payouts throughout the next several years. Magellan's increasing payments show just how confident the partnership is in its future outlook -- it's no surprise the shares are up nearly +40% during the last five days.

     Wall Street Cheers Dividend Increases

     This goes to show how much Wall Street likes dividend increases.  When companies are able to hike their payouts in a difficult economic climate, traders really go bananas.  Everyone is suddenly reminded of the underlying strength of the business and the company's ability to perform.  Wells Fargo, for instance, stunned Wall Street when it raised its dividend nearly +10% in the midst of the worst financial shake-up since the Great Depression.  Shares gained a remarkable +33% in a single day this July -- and have since risen even further -- even as other banks have seen their share prices plunge.  

     High-Yield Investing Editor Carla Pasternak didn't need to read the news from Standard & Poor's to understand that companies with increasing payments are where income investors should be focusing.  She's an astute analyst and an active income investor, and she had already done the research by the time S&P issued its findings. 

     In the most recent issue of her newsletter, she focused solely on securities that have continually increased dividends -- even in today's tumultuous market.  These high-quality investment ideas have all raised their payments over the last year, but their 3-year growth is especially enticing:

     Many of the news reports we hear these days are dire.  But if you think every company is suffering and one step away from turning off the lights, remember: The securities listed above are only a fraction of the 346 that raised their dividends. And the companies behind these stocks are sending a clear message that they'll weather the storm.

     In Carla's October issue, she not only provided subscribers the list above, she also dove into profiles of her two favorite securities that are consistently raising their payments.  This includes one investment idea that has increased its distributions +17% a year over the past decade.  Even better --  this security has already boosted its dividend +15% over the last year alone and now yields 8.0%.

     If you'd like to read more about this idea, see Carla's entire list of steady dividend growers, plus receive a stream of stocks, funds, and other investments with abnormally high dividend yields each and every month -- then I'd like to extend you a personal invitation to try her premium newsletter . . . High-Yield Investing. Visit this link to learn more.