From the July 2008 issue of Boomer Market Advisor • Subscribe!

Dividend-paying stocks resilient to market mess

When I was in college, my girlfriend inherited a block of ExxonMobil stock from her grandfather. While he was alive, he preached the value of dividends and how they will take care of you in good times and bad. He told her never to sell the shares.

I never forgot what a lifesaver that check was for her. It wasn't a big amount, about $300, but it always came at the right time, when schoolbooks were needed or the rent was due. Good old ExxonMobil -- boring, predictable and always there to help.

It's time to revisit the old and boring dividend stocks again.

I recently spent time with Tom Cameron and Greg Donaldson, two seasoned money managers who dedicate their professional lives to finding dividend paying dullards. They believe dividends are exactly what investors need in the aftermath of the subprime mortgage fiasco. And certain dividend-paying companies are proving to be downright weatherproof against recession.

Donaldson, director of portfolio strategy for Donaldson Capital Management, showed me a chart of companies that have raised their dividend every year over the past five years on an average of 10 percent or more. The resilience of some of these companies in the past months was profound: all of the large companies in his basket had raised their dividend; not one had lowered. The list included Coca-Cola, Abbot Labs and ITT.

Donaldson believes our chances of having found the market's bottom is now at 70 percent, which he credits to the Fed rate cuts and the bailout of Bear Stearns. But he also believes it will be a choppy market for some time. That means that companies like Colgate Palmolive, which just raised its dividend another 11 percent (to 40 cents per share), will provide one of the few bright spots in a client portfolio.

He also likes Proctor and Gamble, not just because it doubles its dividends almost every seven years, but because it is a worldwide operation with more than 54 percent of sales occurring overseas.

Cameron, who manages the Dividend Growth Advisors mutual fund, blames hedge funds, especially offshore hedge funds, for a chunk of the financial mess. Cameron believes these mortgage debt packages are so complex they are nearly impossible to understand, which explains why many are no longer trading. Since he began his investment career in 1951, Cameron has seen it time and time again: the more complex the investment, the more trouble investors get into.

His core philosophy is simple -- buy companies that have raised their dividend an average of 10 percent or more a year for ten consecutive years. This is why he likes McDonald's, IBM and General Electric.

But what about the favorable tax treatment set at a maximum of 15 percent? Unless Congress acts, it's set to expire at the end of 2010, possibly leading to a sharp sell-off. Cameron believes it's important for stockholders to continue receiving dividend increases that are either at, or greater than, the rate of inflation.

Donaldson says many of these large companies are in pension plans, 401(k) plans and other tax shelters where tax law changes are irrelevant. Also, foreign countries own large positions so these laws have no effect on them.
For those interested in researching dividend rising stocks, go to www.dividendachievers.com and www.dividendinvestor.com.

Richard Price is an analyst with Investors Capital in Lynnfield, Mass. He can be reached at rprice@investorscapital.com.

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