More from David at The Sovereign Society:

Dividend-paying stocks used to offer a way to “play it safe.” Especially during bear markets, the regular paychecks could help “soften the blow.” But not anymore.  The truth is; dividend investors are getting hammered.

The Wall Street Journal calculated that 36 companies in the Standard & Poor’s 500-stock index have cut or suspended dividends this year, removing $33.3 billion from investors’ pockets.

And of the 7,000 or so publicly traded companies that report dividend information to the S&P, 138 decreased their dividends during the third quarter… a 15-fold increase from the same period last year.

And since these floodgates have been flung wide-open, many more companies will now join the trend and feel it’s alright to cut their dividends. Remember, stock dividends are not contractually guaranteed. So with a wave of a CEO’s hand, they can disappear.

The Secret of “Guaranteed Dividends”

But today I’m going to teach you how you could get those same companies to “guarantee” to pay you a dividend. And not just 4% or 5%… but 10%, 15% even 30%.

Better yet these “dividends” will be paid to you not quarterly or semi-annually but monthly. Cash will be delivered to your account on the same day every month, month after month… “Guaranteed”.

What I’m talking about are Structured Investments and specifically a widely used product in the financial industry known as Reverse Convertible Notes.

For those of you not familiar with Reverse Convertible Notes (RCN’s), they’ve been around for years. Widely used in Europe but usually offered to only the wealthiest of U.S. investors, RCN’s are now finally available to the retail investor.

Reverse Convertible Notes are securities that offer individuals a predictable, steady stream of income. They pay a high coupon – much higher than the return you would receive on fixed income securities.

Here’s an example…

Let us suppose you like General Electric (NYSE:GE). The stock is currently trading at about $15.00 per share, which you think is a steal. Even if the stock market drops further and pulls GE down with it, you’re OK with a $15 purchase price plus its 8.2% dividend yield.

But what if I told you I could get you a better deal on GE? I can offer you a “cash dividend yield” of 19.3%… and if the stock falls all the way back to $9.75… you could care less. You didn’t own the shares anyway.

Well that’s the power of Reverse Convertible Notes.

Here’s another great example:

Goldcorp (GG) – You want yield, you need cash every month and you’re a gold bug. We’ll there’s an RCN currently being offered that will pay you a 20.80% annualized cash “dividend check” for the next three months. Worst case… you’ll own the shares of Goldcorp at this incredibly depressed price and still get the dividend.

That’s pretty much a win-win deal if you ask me.

The Disclaimer

Now before you get excited and rush out to buy the first RCN you can get your hands on, I must tell you that these products can sometimes be complicated. You have to be careful with your issuers, and I’ve seen a 60-page prospectus on a single RCN before. So you always want to do your homework, and – most of all – make sure you get some good advice on which of these RCNs is the best investment for you.

For example, it’s taken me a solid 14 months of research to get to the bottom of this little-known income-boosting market. But it’s starting to pay off. Just last week, I found a way to squeeze a fat 10% return out of Wal-Mart – without buying a single share of stock. And that’s the lowest return I’ve encountered so far!

And if you want to be able to capture this kind of profit without all the time and energy leafing through prospectuses and talking to brokers, then I’ve got something for you. It’s called Accelerated Income, and it’s a service that I started to make the whole process easier on you the investor.

In Accelerated Income I tell you about some of the best values in the marketplace and how you can get them. I cut through all the finance-speak and tell you about the product’s advantages and disadvantages in plain English. Despite their best efforts, these investments aren’t rocket science… and they don’t have to seem like it.

Source: Don’t Get Burned by Wall Street’s “Cut-and-Run” Routine

Sure, he made a few deals, but nothing spectacular. Largely, while everyone else was borrowing like mad, he amassed an even bigger cash pile than he already had.

Of course, now that credit is a dirty word, and basic, non-derivative-based hard cash is suddenly worth something again, that cash pile is in demand.

And that means Mr Buffett is suddenly doing deals again…

Buffett’s hard cash buys him a half-price chunk of Wrigley

Warren Buffett is helping confectionary giant Mars to take over chewing gum group Wrigley. Mars is stumping up $80 a share, or $23bn in total, of which Mr Buffett will provide $4.4bn. The rest of the money is coming from JP Morgan and Goldman Sachs.

What does Mr Buffett get out of it? A 19% chunk of Wrigley, for the trifling sum of $2.1bn – pretty much half-price.

Chairman Bill Wrigley Jr said: “There’s no question that the financial markets are very challenging right now and coming up with the financing was a challenge.” Which is why people with deep pockets and large savings piles, like Mr Buffett, are able to command such attractive terms in return for their support.

The deal will make the combined group into the largest confectioner in the world, reports The Times, with a 14.4% market share, pushing Cadbury Schweppes into second place on 10.1%. Mr Buffett is well known for his general fondness for the sector, which he believes is about as recession-proof as you can get.

And it’s a good thing too, because he also expects that “the recession will be longer and deeper than most people think – this will not be short and shallow.”

This is a view that commentators are gradually coming round to – at least as far as the US goes. More than a few research notes predicting a U-shaped (long trough), rather than V-shaped (short and sharp, followed by a rapid recovery) recession for the US.

Many people still think however, that the UK will be just fine – not least our Chancellor, Alistair Darling. Sadly for Mr Darling, even the EU disagrees with him. The European Commission yesterday said that the UK’s economic growth would slow to 1.7% this year, at the bottom end of the Government’s forecasts for 1.75%-2.25%.

But where the Treasury sees a miraculous rebound to 2.25%-2.75% growth next year, the Europeans reckon we’ll see 1.6% growth in 2009.

I still think this is rather optimistic, but at least it’s going in the right direction. Given that Britain will be in the midst of a fully-fledged housing slump at that point, accepting reality now and making some preparation for the downturn would be a good idea.

Banks are finally accepting reality

You can’t of course, expect the government to accept reality – it would rather spin it out of existence. But the banking sector looks as if it’s being a little more realistic. Britain’s biggest mortgage lender, HBoS, as was widely flagged in the weekend press (see yesterday’s Money Morning for more: Why HBoS should jump at the chance to raise cash), has decided to go ahead with its £4bn rights issue. The group will offer to sell two new shares for every five at 275p a share, 45% below Monday’s close of 495.75p. Shareholders will have until August 7th to decide whether to take up the offer or not.

The dividend will also take a hit, unfortunately. The bank will cut its dividend payout ratio from 46% to 40%, while the interim dividend will be paid in shares. It still aims to pay the final dividend in cash.

Meanwhile, it has taken about £2.8bn in writedowns. The bank is also targeting a core Tier 1 ratio of between 6% and 7%, which would put it at the higher end of the banking sector, and also raises the game a little on RBS’s aim for 6%.

Chief executive Andy Hornby said he expects house prices to fall by “mid-single digits” both this year and next. The bank warned that it also expects bad debts to rise this year.

The move to raise money seems a wise decision. It’ll be uncomfortable for management and shareholders just now – particularly after HBoS’s indignant reaction to the recent rumour-fuelled share price collapse – but better to make a cash call now than have to do it later.

Rival banks who have dismissed the idea, such as Bradford & Bingley, may come to regret it. We’ve regularly warned readers to ignore tempting dividend yields and stay away from the banks, and we’re certainly not changing our tune yet.
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