Tuesday, August 31, 2010

Something is Going on Here...

This morning, The Wall Street Journal highlights the fact that a basket of 18 companies reaching their peaks in the past month are all makers of goods considered necessities should financial calamity hit. The Journal points out that, "the bunker portfolio, while vastly oversimplified, does reflect investors' preference for companies with products that are relatively immune to economic swings, and whose conservative strategies are suited to these uncertain times." Indeed, most of the companies hitting highs are producers of inelastic goods - those whose demand will remain stable even if prices increase.

However, the important thing to note about this group all hitting highs at the same time is not that the underlying companies represent a "Who's Who List of Armageddon Protection Purveyors" (that's a mouthful!). More importantly, it's that they are all true defensive stocks and have histories of paying and increasing their dividends.

As the article hints at, when the economy dips further into recession and the business cycle continues to pound cyclical names, the best area to look at are the steady dividend payers, hence the rise in The Journal's sample portfolio. In fact, the article says that "many of the star performers are steady dividend stocks: At least half of the companies on the list have increased their dividends this year, including Cummins, Dr Pepper Snapple and Airgas." Investors flock to safety when they sense that there's uncertainty in the market and one of the safest places to look among equities for safety are companies that pay a dividend and raise that dividend consistently. Outside of large amounts of free cash flow, a rising dividend is one of the few surefire signs of financial strength at a company.

Interestingly, the only stock on the list that's down year-to-date - JM Smucker - is still up roughly 70% from the bottom it hit during the peak of uncertainty in the financial crisis.

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