This from Investment U:

We’ve endured three consecutive weeks of losses for the S&P 500 (.INX). Never fun. But if you’re an income investor, ala Charles Dickens, the worst of times is creating the best of times…

Dividend yields now rest close to 15-year highs. Plus, the premiums from writing covered calls (the only safe options strategy) are significantly higher thanks to the extreme market volatility.

As far as I’m concerned, that’s an attractive one-two income-earning punch we shouldn’t ignore.

So how do we play it?

Not with the usual suspects…

Income Investors: GE Is A Dog at Any Price

There’s something about an adolescent stock price on General Electric (NYSE: GE) that turns most income investors rabid. Much like they were last summer for Bank of America (NYSE: BAC). But I continue to get in arguments with friends and colleagues about this.

I don’t care if GE trades below $20 per share, $15 per share, even $10 per share. It’s a terrible stock to own right now.

I know in some circles, such an utterance is blasphemous. Before you conclude the same, at least hear me out…

First things first…

• Simple businesses make money.
• Investors can understand simple businesses.
• And therefore, stocks of simple businesses tend to perform best (consult Warren Buffett’s track record should you disagree).

But – you guessed it – GE doesn’t pass the simple test.

Its business is all over the place. Last quarter, it logged sales in the following segments: water, security, railroads, oil and gas, media and entertainment, lighting, health care, consumer lending, commercial lending, energy, electrical distribution, consumer electronics, aviation and finally (drum roll) appliances.

Try coming up with an elevator pitch for Jeff Immelt for that mess. Jack of all trades, master of none, perhaps?

To be fair, GE does provide exposure to compelling sectors and trends – like energy and infrastructure, water, and green technologies. But it only accounts for a small portion of the revenue pie. And meaningful growth in these segments will always be overshadowed by declines elsewhere.

Case in point, in the fourth quarter, GE’s energy business increased profits by 27%. A homerun by any measure. Too bad the rest of the team struck out – weakness in other segments caused GE’s overall profit to drop 44%.

Bottom line, even after a 60% stock decline in the last year, GE is still a $137 billion behemoth. Moving that earnings needle, and in turn the stock price, requires over a dozen business segments to be firing on all cylinders, simultaneously. That’s not happening. Not now or anytime in the near future.

But How Can We Turn Down a 9% Dividend Yield?

After considering the above, most GE defenders shove their security blanket – the hefty dividend yield – in my face, saying, “At least I get paid 9% to wait for the stock to turnaround.”

True.

But it could take years for the underlying businesses to turnaround. Moreover, as Bank of America proved, no dividend is immune to a cut.

Last summer CEO Ken Lewis said it was safe. Then in October, he ended the streak of 30 years of increases. And he cut it.

The same fate appears likely for Dow Chemical (NYSE: DOW). Last month CEO Andrew Liveris declared a dividend cut wouldn’t happen on his watch. Fast forward to this week, and he concedes a cut is now possible. Keep in mind, Dow Chemical’s dividend has never been cut since it was first instituted in 1912.

By now, Yogi Berra should come to mind, “It’s like déjà-vu, all over again,” because GE’s Immelt continues to deny the possibility of a dividend cut. He also wants to maintain the company’s coveted AAA rating. Yet, if current conditions persist, and management is desperate for cash, trust me, the dividend will get the ax.

For Income Investors – A Better Alternative Income Investment to GE

It wouldn’t be fair for me to bash GE as an income investment and not offer up a better alternative. So here it is – TEPPCO Partners (NYSE: TPP).

It’s one of the oldest publicly traded energy master limited partnerships (MLPs), with over 12,500 miles of pipeline. (For a thorough overview of MLPs, I recommend this MLP primer.) And it currently yields 11%.

Here are the five main reasons I believe the dividend is safe -

• Its business is simple. It gets paid to transport fossil fuels, based on total volumes, not the price of the underlying commodity. While the price of crude might be off significantly, I guarantee you worldwide demand, and the volumes to be transported, is not. Such a simple business makes it easy to spot breakdowns, and in turn, recognize when the dividend is truly in jeopardy.

• The revenue stream is highly reliable. We’re addicted to oil. And no matter how green the world gets, we’ll still consume plenty of it. That means the registers will keep ringing for TEPPCO, and there will always be cash in the till to pay out dividends.

• Management believes in conservative growth. Overdosing on debt to fund expansion is a recipe for disaster. If borrowing costs increase (like now), more cash needs to be set aside to make interest payments. If they jump too high, too fast, something has to give. And most times, it’s the dividend. Thankfully, TEPPCO believes in conservatism. For the past five years, it’s financed 75% of its growth through asset sales and equity contributions. In other words, interest payments won’t threaten the dividend one bit.

• Insiders keep buying. Insiders know best and Dan Duncan, the CEO of the general partner that controls TEPPCO, plunked down $7 million last September, at much higher prices. If the dividend was in jeopardy, he certainly wouldn’t be buying.

• Credit is not a concern. In these distressed markets, we can’t overlook this factor. If a business relies heavily on credit, and is having trouble getting it, look out. No worries for TEPPCO, though. It’s sitting on $600 million in liquidity, enough to fund almost all of its proposed capital expenditures for 2009.

Truth be told, I recommended TEPPCO to subscribers a month ago when it traded around $18. Now we’re up 48%. And we haven’t even received our first dividend payment, yet.

Even after such an impressive move, though, I estimate at least another 36% upside remains.

Here’s why…

• The company sports strong fundamentals: earnings, distributions and its operations are all growing.
• It owns prime assets. Namely, the only pipeline transporting liquefied petroleum gases from the Texas Gulf Coast to the Northeast and the sixth-largest U.S. inland barge operations.

Both make it a prime acquisition candidate.

And history dictates MLPs should only average a 7.83% yield, based on the Alerian MLP Index. To bring its yield back inline with the historical mean, TEPPCO’s stock needs to rally another 36%.

Add it all up and it’s a no brainer. If you want high and reliable income, with the potential for capital appreciation, too, forget GE and buy TEPPCO. Or at the very least, ensure any high dividend-paying stocks you’re considering boast the five qualities above.

Source: Income Investors: Dump GE & Buy This Safer Income Investment Instead

More from Investment U:

How long does it take your portfolio to recover after a devastating bear market?

It took a little over a year to get even after the stock market crash of October 19, 1987, over four years to get back your money after the treacherous 2000 to 2003 bear market, and more than five years after the 1973 to 1974 debacle.

This time around, with the Dow down 40% from its high of a year ago, it may take three to four years to get back to even. Ouch! If you are waiting for the new administration to bring you back to even, you may have a long wait.

But there’s a way to avoid this entire “catch up” worry: Buy stock indexed annuities. I call it “peace of mind” investing. My wife even has her IRA money invested in them. She hasn’t lost a single penny in her IRA this year because of her indexed annuities. And when the market does recover, she won’t miss out on its gains.

What Are Stock Indexed Annuities?

A stock indexed annuity is a tax-deferred annuity that combines the downside protection similar to a fixed annuity, money market or CD. But unlike these safe money investments, your interest earnings are calculated based on the performance of a stock market index such as the S&P 500, Nasdaq 100, or even European or Asian stock indexes. It enables you to profit from a market recovery.

Of course, you pay a price for eliminating your downside risk.

In exchange for the guarantee, equity indexed annuities typically pay slightly less than the full return of the S&P 500 Index. For example, an indexed annuity using “participation” might offer a “50% participation rate.” This means you’ll earn 50% of the increase of the selected stock market index. If the index is up 20% for the year and your participation is 50%, your return would be 10%.

But in the long run, the total return can be outstanding because in years the market drops, your capital is preserved. You are ahead of the game when the market moves back up.

Below is a hypothetical illustration showing how a stock indexed annuity would have performed compared to the S&P 500.

* S&P 500 return figures does not include dividends nor does the Stock Indexed Annuity.
**Indexed Annuity returns are calculated using monthly averaging, 100% participation, no cap, and a 2.95% spread.

As you can see, the stock indexed annuity would have averaged 8.39% while the S&P 500 only earned 4.40%. That’s mostly because in 2000 to 2002, thanks to the ability to lock in 100% of the gain, the indexed annuity didn’t lose a dime, while the S&P 500 Index got pounced, losing 21.47% in 2001 and 19.97% in 2002.

For over 12 years now I have been directing investors toward no-risk stock indexed annuities created by top insurance companies. Last time I recommended it was September 2007, near the top of the market. But they can be purchased regardless of where Wall Street is.

How Safe Are Stock Indexed Annuities?

One of the questions I often get is how safe are stock index annuities? And my first part of my answer is generally, “As safe as a life insurance policy.” My second answer is, “So make sure you’re investing with the right company.”

Today more than 50 companies offer stock indexed annuities with over 300 different products and dozens of ways to calculate your interest earnings. Make sure to stick with insurance companies that are rated highly by both AM Best and Weiss Services. (A good Weiss rating is vital – earlier this year AM Best rated AIG an A+ company; Weiss rated it a D.)

Most equity-indexed annuities are not registered with the SEC and are regulated under insurance laws. Annuities are backed by the state insurance reserve and multiple re-insurance companies.

So far no fixed or stock indexed annuities have defaulted on what is owed. (Fortunately, AIG was bailed out, so its annuities are safe.) Like any insurance product, it pays to do your research. A company’s history and longevity are some of the best benchmarks you can use.

Countless investors have been sacrificing returns for safety. But with stock indexed annuities, it’s a decision that they shouldn’t have to make.

Source: Stock Indexed Annuities: A Powerful Investment For Getting Back to Even

This from Today’s Financial News:

Income investors have little to cheer about these days, with profits plunging and dividends getting slashed, but there are some glimmers of hope.

When a long-term stalwart Blue Chip like General Electric (NYSE:GE) steps out its corporate front door and tells investors to plan on their dividend payments throughout the next year, investors pay attention. When that $0.31 per quarter dividend leads to a yield of over 10%, smart investors call their brokers and grab some shares.

Instead of seeing their holding increase in value today, GE shareholders are seeing a 7% decline so far today [Thursday]. It marks one of the greatest buying opportunities you will see in your lifetime. Shares have not been this cheap in over a decade.

GE is one of the strongest, most stable companies in America. Yes, its financial arm has gotten it into some hot water, but let’s not forget this a mega-conglomerate we are talking about.

The company has more than enough bullets in its holster to see its way through a strong recession. GE is about far more than finance. It is well positioned in strong industries like healthcare, energy development and water filtration.

But even if Wall Street continues to focus solely on GE’s finance business, it will soon learn the error of its ways. Just yesterday, the FDIC gave the company a shot at significantly lowering its borrowing costs by backing $139 billion of its debt. It is a move that assures GE will not permanently falter due to the temporary credit crisis.

GE’s revenues will fall over the next few quarters and profitability will suffer, but investors that buy now will not care one bit as they are cashing those hefty dividend checks.

Strong companies like this do not pay huge dividends often. Take this opportunity to lock in the income stream while you still can. As soon as sentiment turns around, you can bet investors will be lined up to get their hands on shares of this great American company.

Source: Income investing: Dividend opportunities during a recession

More from Money Morning:

The reality is that these bailout programs remain with us, meaning we must factor them into our efforts to scout out profit opportunities. And on that point, we see six primary areas of change and opportunity:

• The U.S. Dollar: By pumping an estimated $3 trillion into the global financial system, the U.S. government is setting the stage for the mother of inflationary conflagrations. According to classic economic theory, the greenback should be in an actual freefall right now – especially in the current low-interest-rate environment, where there’s the potential for still more rate cuts and for additional capital outlays by the U.S. government. And that’s just with the current administration. President-elect Barack Obama has made it clear that if an additional stimulus isn’t announced before he takes office, he’ll make that one of his first official acts. What’s saving the dollar, at least for now, is that there’s so much global uncertainty that the dollar is retaining its reputation as a “safe-haven” currency. And, for now, at least, a safe U.S. dollar trumps inflationary concerns. However, should global investors regain confidence for whatever reason, expect the dollar to decline sharply.
• Oil: Many people are focused on declining oil prices as a function of a perceived slowdown in global demand. We think that’s an erroneous analysis for three key reasons. First, oil is still largely priced and traded in U.S. dollars. That means that as the dollar has risen, oil has become correspondingly cheaper. In other words, much of the price decline we’ve seen can simply be attributed to a rise in purchasing power associated with a stronger dollar. Second, China, India and other newly capitalist (and still-reasonably robust) economies are still increasing their oil consumption at a rate that more than offsets the decline in consumption we’re seeing here in the United States and in other developed markets. And third, Brazil aside, there hasn’t been a major new discovery capable of offset global demand on anything more than a temporary basis for more than 30 years, and most major oil fields are in decline or soon will be. Increasing demand and diminishing supply are clearly bullish influences over the longer term. More immediately, however, a stronger dollar negates this and may well keep oil under $100 a barrel for much of 2009. Obviously a terrorist attack would change the ballgame significantly, meaning we could see a spike to levels exceeding our multi-year target price of $225 a barrel. A year ago at this time, we called for oil to spike well up over $100 a barrel, and touch $150, which it essentially did. Even with recent price declines, some energy-industry insiders are starting to subscribe to our bullish outlook: The Paris-based International Energy Agency (IEA) last week projected that long-term oil prices would reach $200 a barrel (although we think that will happen much sooner than the IEA does).
• Commodities: The story is much the same for commodities, in general, and we expect that longer-term investors will be amply rewarded. More immediately, the popular – though erroneous – assumption that a global slowdown will negate demand is driving prices lower, and may continue to do so for the next six months. Gold will be the most obvious casualty in this arena, as hedge-fund-redemption requests and margin calls continue to mount, which is why we expect the price of the yellow metal to remain lower far longer than most people expect (We’ll focus specifically on gold in an upcoming installment of the “Outlook 2009” series). When it does rebound, however, the returns will be high.
• Global Markets: There’s no doubt that the global markets have taken their share of lumps along with their U.S. counterpart in recent months. But we don’t expect them to suffer forever. Countries with high cash reserves as a percentage of gross domestic product (GDP) – such as China, India and Brazil – are becoming less dependent on the fractured U.S. consumer almost daily, and the economic decoupling we’ve seen developing for several years may really take hold in the New Year. This stands in direct contrast to the situation a decade ago, when the Asian Rim and South America were economic train wrecks and the United States and Europe held all the cash. Companies with significant global exposure to the Asian Region, Latin America and Europe – in that order – remain the best bets for relative safety and growth in 2009.
• Stocks in General: Many investors are questioning the wisdom of being in stocks at all. While we certainly understand the pain that sentiment is based upon – and are hurting, too – it’s important to remember that the last time stocks really performed this badly was during the 1930s. Investors who decided to “get out” entirely then missed the investment opportunity of their lifetime. Don’t make the same mistake. Data shows, unequivocally, that investors who buy when the world is going to hell in a hand basket –think 1932, 1942, 1982 and 2003 – enjoy the largest returns. That’s even true if you’re “early,” and buy ahead of the specific market bottom. However, history also demonstrates that investors who pile in at the market’s peaks – such as 1928, 1969, 1999 and 2007 — tend to incur the worst returns.
• Global Stocks in Particular: Led by cash-rich China, we expect global blue chips to remain the best relative bets for safety, income and appreciation potential in the New Year. We are especially focused on companies involved with infrastructure projects and with firms that derive substantial portions of their revenues from Asian consumers. The first is a no-brainer. According to the latest studies from a variety of sources, planned global infrastructure expenditures in this area exceed $40 trillion by 2030. There is not a bigger, more unstoppable trend on the planet today. If you want proof, notice that a big portion of China’s just-announced half-trillion-dollar stimulus package is devoted to infrastructure projects. Infrastructure companies there will certainly benefit. So will consumer-products firms that are positioned to benefit from the rise of an increasingly Asian consumer base, which boasts significant savings and pent-up demand. Many of the best companies are beaten down to the point that they now feature single-digital Price/Earnings (P/E) ratios – lower than we’ve seen in decades. Some are actually trading for less than cash value, despite a strong history of growth. And the companies we’re studying have solid cash flow – and excellent prospects of maintaining it.

Now for the $64,000 question – when could we see a rebound?

We don’t know for sure. Nobody does. History demonstrates that the first and second years of any newly elected U.S. president’s term are almost always problematic. When taken in isolation, we could see a scenario where this is countermanded by President-elect Obama’s planned stimulus, but given the potent combination of flagging earnings and slowing U.S. growth, we’re leery of doing so. 

On the other hand, for a variety of reasons, history also suggests that if we are to see a rebound, however nascent, the probability is highest for a resurgence starting in the middle of next year. First, since the 1970s, the time between the first and last market lows in any given bear market is an average of seven to eight months. If historical trends hold true, this suggests we could see a bottoming out by the middle of next year. That’s consistent and plausible, especially since other data shows U.S. recessions, on average, last 14.6 months – which also points to a bottoming out in late spring or early summer.

But the biggest indicator of all that we may see a bullish rebound in late spring or early summer – however slight – is admittedly based on emotion. Literally. Small investors have fled the stock markets in droves, and so far they’ve yanked more than $175 billion from the markets, with nearly 50% of that coming out during October alone. Granted, this is a mere 3.2% of the $5.5 trillion invested in stock market funds, according to Forbes, but it’s the first year that net equity flows have been negative since … a drum roll please … 2002.

History shows that small investors may be the most telling of all Contrarian indicators. According to TrimTabs, the Investment Company Institute and our own proprietary research, individual investors have a remarkable habit of rushing in near market tops and fleeing near market bottoms.

That means that long-term investors seeking the best wealth-building opportunities should find the immediate price declines we see ahead to be some of the most compelling buying opportunities of their investing lifetimes.

Now for the caveats – and you knew this was coming – we see three wildcards in 2009, and any one of them could prove to be a joker:

• The continued de-leveraging of hedge funds and other financial institutions.
• More credit-default-swap valuation problems.
• And unknowns associated with the ongoing U.S. and global-economic-system bailouts.

There are still huge questions regarding who owes what to whom, how large the debts are, and exactly who’s going to get what help and when. History shows that the most effective bailouts are those that recapitalize institutions and that allow the weak to fail, which is why we are especially leery of the U.S. government’s plan to acquire bad debt while rewarding weaker institutions that should be put out of their misery.

What’s more, as a Money Morning investigative story demonstrated, many banks are using the government bailout money as takeover capital, and not to boost their lending, which at least would have had an expansionary benefit for the U.S. economy. With most of the bailout programs, and through no fault of their own, U.S. taxpayers and investors have been caught in the middle – or left on the sidelines altogether.

The Outlook 2009 Action Plan

For investors who want to get a head start, it’s important to bear in mind that the markets tend to begin their rebound in earnest anywhere from two months to six months before an actual economic bottom. While that doesn’t suggest going “whole hog” into stocks, it does speak to the need to take some steps now to get ready. Here are the top moves to make now:

• Rebalance Now: As markets have declined, many portfolios have done out of kilter, too – not only in terms of value, but in terms of balance. And that lack of balance can seriously dampen returns, even as we await the market recovery – and even more so once the market begins to rally. It’s far harder to catch a moving train than most investors think.
• Think Safety First: There’s no need to rush into the markets. It’s not clear we’ve hit bottom yet. Keep your powder dry for the better days and easier trades we see developing ahead, while bargain-hunting for those stocks with true upside, and that are positioned to capitalize on the strongest global trends.
• Spread your buys over several days: When you’ve found something to buy, wait for a particularly bad day, then place your order in the last half an hour of trading. Leverage the lower prices (and maximize your returns) by spreading your purchases over several days or weeks. That way you won’t get tripped up by committing your entire nest egg when the market looks cheap and will probably get cheaper.
• Go Global: China is still on track for 9.6% growth this year and may, in fact, slow to a “mere” 8.0% next year. Even that reduced growth rate will probably be about eight times the growth rate of the U.S. economy – if we’re lucky. Consider adding exposure to the Asian Rim as part of the rebalancing process, or as a primary focus once the recovery begins in earnest.
• Get Inverted: Continue to use specialized inverse funds to hedge downside risk. We’re not out of the woods by a long shot.
• Stop Your Losses – with Stop Losses: By all means include trailing stops to control small losses before they become catastrophic ones. This market could easily fall further before it gives way to the rally that history suggests is in the making.

Source: Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009

More from Money Morning:

A properly structured and globally diversified portfolio using the 50-40-10 allocation model (50% “base-builder” foundation investments, 40% global growth and income plays and 10% “rocket rider” speculative investments that will perform well in a recovery) we recommend in The Money Map Report – our affiliated monthly investing newsletter – will prove to be an investor’s best friend. And the reasons for that are as simple as they are compelling:

• First, a properly structured portfolio has built in safety brakes that keep us from making overly risky decisions.
• And second, while this allocation model was constructed to minimize our downside in markets such as the one we’re navigating right now, it also positions us to benefit when the rebound eventually gets under way.

During the past year, we’ve repeatedly urged our readers to make sure two other elements are part of their portfolio: Dividend-paying stocks and specialized “inverse funds” that gain when the markets decline.

While dividends are important in any market, they’re downright crucial now because they add to returns during market rallies and help offset losses during market declines. And our commitment to inverse funds was rewarded during the whipsaw month of October: During a month in which the Standard & Poor’s 500 Index lost 16.8%, the Nasdaq Composite Index shed 16.3% and the Dow Jones Industrial Average dropped 13.9%, all 10 of the best-performing exchange-traded funds (ETFs) were inverse funds, which boasted one-month returns ranging from 36.4% to 66.6%, Thestreet.com reported last week.

Now those are admittedly highly remarkable returns – and clearly aren’t the norm. But it does demonstrate the point we’ve been making: It pays to protect y our downside even as you position yourself for gains. And not only do such investments as inverse funds hedge our downside, they smooth out our overall portfolio volatility and help calm roiled waters.

Source: Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009