Finding the Sweet Spot of Investing

Reduce a portfolios risk without giving up on high returns

Dividend-Producing Stocks

If only 5%-10% of your portfolio is allocated to emerging markets, you probably should hold stocks from the U.S. and other developed nations as well. In order to minimize exposure to a freefall like the one we all experienced in 2008, you might want to include dividend-paying stocks. “Look for companies that have enough net income to easily cover the interest on their debt and the dividends they pay to shareholders,” says Eugene Profit, who heads Profit Investment Management (No. 15 on the BE Asset Managers list with $900 million in assets under management). “Those companies have strong fundamentals so they are likely to hold up well in any type of economy.”

What’s more, current law calls for stock dividends to be taxed no higher than 15%, through 2010. (Bond interest, on the other hand, may be taxed as high as 35%.) Among Profit’s current holdings, he is especially upbeat on these dividend-paying stocks:

Verizon (VZ): This telecom giant, the largest wireless carrier in the U.S., now has a dividend yield over 6%. “The company may get the rights to sell [Apple’s] iPhone in the next year or two,” Profit says. “In the meantime, the high dividend means investors are being well-paid to wait for news that might boost its stock price.”

General Electric (GE): This company has been included in the financial sector because of its GE Capital subsidiary. As a result, its stock price has suffered in the credit crisis. “GE really is an industrial company, not a bank,” says Profit. “It is well-positioned to increase earnings as the economy recovers.” Meanwhile, it offers a well-covered 5% dividend yield.

United Parcel Service (UPS): Profit puts the current dividend yield at 3.25%, which is as high or higher than you’d get from most bank accounts or Treasury bonds. “In addition,” Profit says, “UPS has the highest profit margins of any major company in the transportation industry. So investors might see its stock price move up when the economy improves.”
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Home Depot (HD): The home improvement retailer has a current yield of 3.40%. “Shelves look empty at Home Depot these days as homeowners launch do-it-yourself projects and hire contractors, either to help sell their homes or make them more comfortable because they’ll be there for awhile. Also, management is making an effort to be more customer-friendly,” says Profit of the company whose current dividend yield is around 3.4%.

Johnson & Johnson (JNJ): The healthcare company has a current yield of 3.2%. Profit admits that healthcare stocks have been up-and-down with all the talk of federal healthcare reform. “Once that’s resolved,” he says, “the basic fundamentals will emerge: an aging nation and an aging world mean more demand for healthcare.”

Overall, Profit suggests mixing high-dividend stocks with growth-oriented issues that pay little or no dividends. If you are getting an overall 2% to 3% yield from the stocks in your portfolio, you might have current income, upside potential, and downside protection if stocks slump again.

Wealth For Life Principles

1. I Will Live Within My Means
2. I Will Maximize My Income Potential Through Education and Training
3. I Will Effectively Manage My Budget, Credit, Debt, and Tax Obligations
4. I Will Save At Least 10% of My Income
5. I Will Use Homeownership as a Foundation For Building Wealth
6. I Will Devise An Investment Plan For My Retirement Needs And Childrens’ Education
7. I Will Ensure That My Entire Family Adheres To Sensible Money Management Principles
8. I Will Support the Creation and Growth of Minority-Owned Businesses
9. I Will Guarantee My Wealth Is Passed On To Future Generations Through Proper Insurance And Estate Planning

10. I Will Strengthen My Community Through Philanthropy

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