Thursday, July 19, 2007

Dividends and Interest Rates

"If Economists were any good at business, they would be rich men instead of advisers to rich men."

Kirk Kerkorian


Yesterday's article dealt with the creation of a custom basket of stocks that represented a group of large-cap multinational companies. These companies have aided the market rally along with energy and other companies that deal in natural resources. It is easy to see the rise of these stocks, but what could be the next group to gain some attention? One scenario that could result from the sub-prime mortgage weakness is that the Federal Reserve could be forced to cut rates. If rates start going down, the dollar will get weaker and the same multinational sector created yesterday could benefit. With lower rates there could also could be a rotation into stocks paying a dividend greater than 3.75 - 4 percent.

The chart above is a weekly view of the S&P 500. In the middle section of the chart, is a basket of stocks from the S&P 500 Index that pay a dividend greater than 3.75 percent. These stocks include banks, utilities, and drug companies. The chart shows that in the strong down move starting in 2000 this basket was the recipient of capital rotating out of technology stocks and into safer more stable areas. The scenario could possibly play out again.

The chart below shows the S&P 500 Index in relation to a custom basket of regional bank stocks paying dividends greater than 4%.

This shows the strength that these banks had in a very strong sell off. During this sell off, interest rates were also declining, so these stocks both generated income in the form of dividends along with strong performance. They are not as exciting as Google or Juniper Networks but if you can keep a few of these stocks on the radar during large market sell offs, they can be a silver lining in an awful market. In the long term the dividends alone can make holding a few stocks like these worth while.

Using a program like TeleChart can make it easy to scan for both fundamental data, like dividends, and chart patterns that work together to form a powerful risk-reward situation. It is not necessary to buy the entire basket of stocks, finding the one or two with strong chart patterns gives the best results. Below are two charts from back in 2000 that shows the moves these stocks made in a tough market.

Both Comerica and National City both had strong rallies in price, but even if the price had just held steady, the owners of these companies would have collected a dividend while the rest of the tech market felt like it was going to zero. This does not mean that the next time the same thing will happen, but stocks that pay strong dividends usually have some support when the market feels like its going to hell. So next time there is a sell off and you feel like jumping out a window..think about some of these stocks that pay strong dividends year after year. They are boring, but your pillow will feel softer at night when times are bad.

Below is chart comparing the S&P 500 Index to a basket of utilities paying greater than a 4% dividend.

Below is a chart showing the patterns of the 10year Treasury yield in relation into the basket of regional banks paying strong dividends.

With the weakness in the housing market and the sub-prime mortgage issues, some of these companies are going to be punished by the market. Some are going to be sold because of what sector they are in. It pays to do the research to find the ones with little mortgage exposure. It also is worth considering to try to avoid owning a group of regional banks in the same area of the country. Look for the healthiest one or two in each area. Below is the list of 11 stocks used to make up the basket used in this article.

BBT - BB&T Corporation (BB&T) is a financial holding company. BB&T conducts its business operations primarily through its commercial bank subsidiary, Branch Banking and Trust Company (Branch Bank), which has offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Indiana and Washington, D.C.

ONB - Old National Bancorp (Old National) is a financial holding company. The Company, through its wholly owned banking subsidiary, provides a range of services, including commercial and consumer loan and depository services, investment and brokerage services, lease financing and other traditional banking services.

NCC - National City Corporation (National City) is a financial holding company. The Company's core businesses include commercial and retail banking, mortgage financing and servicing, consumer finance and asset management. National City operates through a banking network primarily in Ohio, Illinois, Indiana, Kentucky, Michigan, Missouri and Pennsylvania.

USB - U.S. Bancorp operates as a financial holding company and a bank holding company. It provides a range of financial services, including lending and depository services, cash management, foreign exchange and trust and investment management services. It also engages in credit card services, merchant and Automated Teller Machine (ATM) processing, mortgage banking, insurance, brokerage and leasing.

HBAN - Huntington Bancshares Incorporated is a multi-state diversified financial holding company. Through its subsidiaries, the Company provides full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, private mortgage insurance, reinsuring credit life and disability insurance, and other insurance and financial products and services.

CMA - Comerica Incorporated (Comerica) is a financial holding company. The Company's principal activity is lending to and accepting deposits from businesses and individuals. Comerica has aligned its operations into three lines of business: the Business Bank, the Retail Bank, and Wealth & Institutional Management. In addition to the three lines of business, Comerica also operates through a Finance Division.

FNB - F.N.B. Corporation is a bank holding company. The Company has four business segments: Community Banking, Wealth Management, Insurance and Consumer Finance. The Company, through its subsidiaries, provides a range of financial services, principally to consumers and small to medium-sized businesses in its market areas.

RF - Regions Financial Corporation (Regions) is a financial holding company headquartered in Birmingham, Alabama, which operates throughout the South, Midwest and Texas. The Company’s operations consist of banking, brokerage and investment services, mortgage banking, insurance brokerage, credit life insurance, leasing, commercial accounts receivable factoring and specialty financing. Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System

NYB - New York Community Bancorp, Inc., formerly Queens County Bancorp, Inc., is a bank holding company. The Company has 166 banking offices serving customers in all five boroughs of New York City, Suffolk and Nassau Counties on Long Island, Westchester County, and the northern New Jersey counties of Essex, Hudson and Union.

WM - Washington Mutual, Inc. is a consumer and small business banking company with operations in United States markets. It is a savings and loan holding company. It owns two banking subsidiaries, as well as numerous non-bank subsidiaries.

AF - Astoria Financial Corporation is the unitary savings and loan association holding company of Astoria Federal Savings and Loan Association (Astoria Federal), and its consolidated subsidiaries. Astoria Federal’s primary business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowings, primarily in one- to-four family mortgage loans, multi-family mortgage loans, commercial real estate loans and mortgage-backed securities.

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