Repair Your Portfolio With Dividends

Featuring Lutts’ Logic:

On the Repeal of Mark-To-Market Accounting

Avoid Banks

Buy These for Dividends

I
received an email from a subscriber last week, asking, “What do you
think about the banking sector after the M2M has been approved?  Should
I get some like BAC, WFC, UBS? “

M2M, for the record, stands for
mark-to-market, the accounting practice of valuing an institution’s
assets at the price the market would pay today.  Critics of the
practice say mark-to-market accounting is partly responsible for the
past year’s market crash, and argue that institutions should be allowed
to value their assets at prices they believe can be realized in a
“rational market.”  In fact, Representative Steve Cohen, D-Tenn., has
introduced a bill that directs the U.S. Securities and Exchange
Commission to suspend the application of mark-to-market accounting.  On
the other hand, Lloyd C. Blankfein, chairman and CEO of Goldman Sachs
(GS), strongly endorses mark-to-market accounting and comprehensive
transparency of financial company risk.  (Goldman Sachs stock, by the
way, looks pretty healthy.)

My correspondent, therefore, was
asking whether stocks in the banking sector might be a good investment
based on the expectation that repeal of mark-to-mark accounting
requirements would lead to fatter balance sheets and thus higher stock
prices.

It’s a logical question, and I have a logical answer.

My
first point is that my correspondent is not the first person to
entertain this train of thought.  Thousands of professional investors
have done it before him.  They’ve already come to their conclusions,
and they’ve placed their bets accordingly.  Therefore the charts of the
stocks that might be affected by the change reflect their conclusions. 
This is a key point; the charts know all.  In fact, the charts reflect
the conclusions of professionals on other factors that might influence
these stocks, too.  These include the future trend of interest rates,
the future of the housing market, even the possibility of increased
government regulation.

And what do the charts say?  First, that
the three stocks mentioned–Bank of America (BAC), Wells Fargo (WFC)
and UBS (UBS)–have all had nice bounces in the past month.  On
average, they’re up 118% since the early March bottom.  They had an
especially nice move last Thursday after Wells Fargo surprised analysts
by projecting a record $3 billion profit for the first quarter.  This
bounce, of course, coincides with the bounce of the broad market, which
is up about 25% since the bottom.

But that doesn’t mean these
stocks are in long-term uptrends.  In fact, this bounce mainly gets
them back up to the upper range of their downtrending channels.  And
those downtrending channels are very important because they’re the
result of a long-term trend.  In fact, even after this big bounce,
these three stocks are down, on average, 85% from their old highs.

Now,
I tend to think that the big downtrend in financial stocks is over …
of course, I could be wrong.  But the strength in recent weeks has been
very broad.  And the selling pressures have been very weak. 
Furthermore, internal measurements are very positive, telling us the
next bull market is getting its act together.

Still, that
doesn’t mean these three stocks (and other big beaten-down financials)
have begun new uptrends.  History tells us, plain and simple, that a
stock–or a group of stocks–that has experienced a huge damaging move
will take a long time to build a base–perhaps years–before a new
uptrend begins.  So the odds are against these stocks climbing much
higher in the weeks and months ahead.

Certainly, there will be
movement.  Institutional ownership of these stocks is widespread, and
we think many institutions will be using this bounce to trim their
positions in these stocks as they move into sectors with better growth
characteristics.  Traders will happily jump in and out of these stocks
in their short-term gyrations.  But I think your prospects are far
better in other sectors, and I discuss a few below.

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One
of the reasons for holding falling financial stocks like BAC, WFC and
UBS so long was their dividends.  And I understand–regular dividends
often cushion the blow from falling prices.  But just last month, Wells
Fargo chopped its quarterly dividend from 34 cents to five cents.  Bank
of America’s quarterly dividend has been slashed from 64 cents to a
penny.  And UBS has suspended its dividend entirely!

Bottom line: you can’t even justify holding these stocks for their dividends any more!

So
what do you do if you want regular income?  What do you do if you’re
retired and looking for a new source of quarterly checks?  Where do you
go to find investments that are safe and pay regular, dependable
dividends?

I suggest you look at Dick Davis Income Digest, our
monthly publication that’s chock full of investing ideas culled from
the experts at the best investment newsletters.  Every issue brings you
dozens of ideas (some new, some follow-ups) on the best
income-producing investments that are available to individual investors.

Interestingly,
most of these investments are not as well known as Bank of America and
Wells Fargo, and that doesn’t surprise me a bit.  I learned long ago
that the popular, well known investments are not the best ones; if
everyone knows about them, they’re often priced too high.  Contrarily,
if most investors don’t know about an investment, it may be priced too
low.  And that’s terrific; it means that as more people learn about the
investment, they’ll bid its price up!

But it takes a sharp-eyed
analyst to uncover these investments in their early days, and that’s
why Dick Davis Income Digest is such a great value–because it’s full
of expert advice culled from the best minds on Wall Street.

For
example, the latest issue of Dick Davis Income Digest featured a
company called Magellan Midstream Holdings (MGG), the general partner
(GP) of Magellan Partners (MMP), one of the nation’s largest midstream
energy companies.  Its holdings encompass more than 80 petroleum
terminals and 10,000 miles of pipeline.  And its dividend is a hefty
7.9%.  Nathan Slaughter, of Half-Priced Stocks, wrote, “As long as the
country needs gasoline and other refined products, the cash generated
by these assets is virtually untouchable.  But here’s the best part. 
As the general partner, MGG owns valuable incentive distribution rights
that give it an ever-growing slice of the pie.  So every time the
limited partner raises dividends, the effect on MGG is amplified. 
Since the general partnership shares went public in February 2006,
quarterly distributions have spiked 82%.”

I look at this
investment and note that not only is the dividend high, but the chart
is trending higher, telling me investors (some of whom have sold their
Bank of America or UBS shares) are discovering this (and other)
up-and-comer and climbing on board.

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Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

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