The Bright Spot in a Gloomy Market

I know I keep saying this, but it's downright ugly out there. Wall Street is in a full-scale panic. Nearly 17% of homeowners are underwater on their mortgages. The Dow is 39% off its high of just over a year ago, and stocks markets around the world are posting similar returns. News stories aren't sure whether this is stagflation, recession, or the beginning of the next Great Depression.

But if you step away from the financial market, things don't look so bad. They don't look so good, true, but they aren't nearly as dire as all that. The unemployment rate is still reasonable at 6.1% (the Great Depression saw levels closer to 25%), gasoline prices are finally starting to recede, and food price increases are finally moderating.

Even if you look at the corporate world, once you step away from companies heavily dependent on raising new money in the credit markets, there's good news to be had.

Panic-free companies
Even with the market meltdown in full swing, there are still strong companies serving their customers and rewarding their shareholders. Value-focused retailer Costco (Nasdaq: COST  ) is posting profit gains, as is technology giant Intel.

In fact, on a day the Dow Jones Industrial Average was busy falling another 679 points, one company announced plans to raise its dividend. Kinder Morgan Energy Partners (NYSE: KMP  ) and its conjoined twin Kinder Morgan Management (NYSE: KMR  ) announced that it expected to raise its payout to $1.02 per quarter -- up from its most recent quarterly distribution of $0.99 and well above the $0.88 it handed unit-holders for the same period a year ago.

In a market like this, that takes guts, confidence, and tremendously strong, reliable cash flow. Yet even that news apparently fell on deaf ears, as Kinder Morgan stock still managed to fall nearly 2% and finish the day with an annualized dividend yield above 9.4%. When the market panics, it panics everywhere.

A way to wait it out
A company with strong performance may see its stock price hammered out of nothing more than market panic. As long as its dividend payments are based on real cash thrown off from real operations, they should remain unaffected.

And getting paid somewhere in the neighborhood of 9.4% to wait for the panic to subside makes living through that panic far more bearable. Of course, not every company is going to offer that kind of incentive for you to buy its shares and then sit around waiting for a recovery. But the ones that do are a tremendous opportunity.

Even if oil pipelines aren't your idea of an ideal investment, Kinder Morgan isn't alone among companies with strong dividends. Just take a look at these companies and their recent dividend activities:

Company

Dividend Yield

Recent Dividend Action

Microsoft (Nasdaq: MSFT  )

2.2%

Raised it by 18%

United Technologies (NYSE: UTX  )

2.9%

Raised it by 20%

McDonald's (NYSE: MCD  )

3.6%

Raised it by 33%

PNC Financial Services (NYSE: PNC  )

4.2%

Maintained it

That list contains a bank that's maintaining its dividend amid one of the largest financial meltdowns in history. It also has a handful of companies that offered double-digit dividend increases while the economy is supposedly in shambles. That's pretty much the definition of operational strength, financial fortitude, and dedication to shareholders.

The power of the payout
Increasing or at least maintaining dividends demonstrates the underlying strength of a company's business -- no matter what its share price does. And in a market in which losers get a $700 billion bailout package and winners see their stock prices halved, well, it's a good sign of where the individual investor ought to be looking.

That's why dividends are our primary focus at Motley Fool Income Investor. If a company can buck the trends of a market meltdown, financial collapse, and general economic malaise and still pay its owners well, then it's worth owning. If you're ready to own the kind of companies that have the best chance of overcoming the macroeconomic conditions, then click here for a 30-day free trial. There's no obligation to subscribe.

At the time of publication, Fool contributor Chuck Saletta owned shares of Microsoft, Intel, and Kinder Morgan Management. Microsoft and Intel are Motley Fool Inside Value picks. Costco is a Stock Advisor recommendation. The Fool's disclosure policy never panics -- well, almost never.


Read/Post Comments (3) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 17, 2008, at 3:04 AM, dividendgrowth wrote:

    If the debt market doesn't recover soon, Kinder Morgan will go bankrupt very quickly.

    Chesapeake Energy most likely won't make it.

  • Report this Comment On October 18, 2008, at 9:15 AM, weiwentg wrote:

    The previous poster seems misinformed about the status of KMP and Chesapeake. Neither company needs access to capital to remain a going concern. With all the headlines around Chesapeake these days I can understand if someone got the wrong impression, but KMP generates really steady cash flows.

    Given that KMP has reached the high splits, where half of each dollar of incremental cash flow is going to the now privately owned GP, I wish Kinder Morgan Inc. (KMI) was still publicly traded. Rich Kinder bought it out a couple years back. KMP will be able to generate very steady distribution growth, but for more aggressive investors I'd recommend either Enterprise GP Holdings (EPE) or Magellan Midstream Holdings (MGG).

  • Report this Comment On October 18, 2008, at 5:59 PM, DrBob66 wrote:

    Microsoft? Yeah, right...I bought some earlier this year (at $28), thinking it was a good value. Little did I know that it's the stock that everyone loves to sell. Doesn't seem to matter that their earnings go up...the stock price just keeps going down. And the 2% dividend...well, that's little consolation. What a value trap. I can't wait to get rid of it.

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