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"Dividend-proof" your portfolio !

What a difference week makes - last week things were pretty gloomy with markets tanking over 7-8% in previous 4 weeks. With unexpected good earnings from GS, INTC, IBM and JPM, things suddenly looks promising again. In one week, S&P is up by 7% and recovered almost all losses over previous 3-4 weeks. If good earnings streak continues next week, it may cross Jun 11 high. Even Government felt compelled to ignore the "bailout" plea from CIT - hope they are not making same mistake Paulson did in Sept 08 when he rejected bailout plea from Lehman.
With summer mid-way, I am still hoping that my prediction of Dow hitting 9000 before labor day weekend would come true. However right now I have started looking past labor day weekend when dreaded months of Sept/Oct come - almost all crashes have come in these two months (except one which we saw in Mar 09). So we need to make the portfolios by adding some crash-proof strategies. One way to do is to rotate into stocks which are paying dividends even during these worst quarters (Q1 and Q2). Here are some recommendations on dividend paying stocks:
  • Penn West Energy Trust (Price: $12 Yield: 11-12%)
  • Harvest Energy Trust (Price: $5 Yield: 10%) - This is my stock of week recommendation. My target price in 12 months is about $7.50
  • CBL & Associates Properties (Price: $5 Yield: 8%)
  • Developers Diversified Realty (Price: $4.2 Yield: 15-16%)
  • ProLogis (Price: $7.5, Yield: 8%)

Even though all of above stocks could go down if markets take downward turn in Sept/Oct, here are the reasons they make a sound investment choice:

  • They would still continue to pay dividends due to their structure as Canadian trusts or REITs (pass-thru entities). By law, they are required to pay 90% of their taxable income to their shareholders to avoid paying taxes.
  • Since they are down by nearly 70-80% from their peaks, they provide a reasonable upside potential when oil/gas and real estate recovers along with economy
  • Many of them have raised equity in recent weeks to reduce their debt and increasing their chances of survival even if economy does not recover for 1-2 years.
  • Stock prices are trading almost as long-term no-expiry options
  • If you build reasonable quantity in these stocks, you could apply selling "covered-call" strategy to generate additional income (like another form of dividends)

As summer project, kids did a small animantion movie using digital photos. Pretty cool !

Have a great weekend !

/Shyam

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