The media have let us know in bold pronouncements that unemployment has exceeded 10 percent, the worst level since the 1980s.
Let's revisit what was written on the subject three columns ago:
"Counter to what the media and politicians would have us believe, layoffs - ugly and undesirable though they may be - are a normal occurrence in a recession; but neither they nor the recession is without end.
"Recessions of various magnitudes and causes always will be with us from time to time. They're part of the business cycle at its extreme. But they end, and when they do, positive things happen. Business begins rebuilding inventory, spending on technology to improve efficiency picks up and overtime hours increase. Ultimately, hiring returns, and unemployment declines. Note that the last positive to take place is improving employment. That's why, as we have written before, unemployment numbers will remain high as we begin moving out of the recession, and may remain high for some time. It's the last positive to fall into place, ergo its label as a lagging indicator.
"These steps take time, but they will happen, and the economic cycle will turn up. That is unless Congress does severe additional damage in tampering with economic laws and fiscal reality. Feel-good populist legislation that impedes the natural forces of a free market system could do irreparable damage to this nascent recovery."
Fine-tuning that information adds a few facts, or steps, if you will, that everyone should consider. Historically, 5 percent unemployment is considered normal. First, look at the progression that occurs as we return to full employment. It starts with an increase in hours worked, then is reflected in overtime hours, as employers prefer to pay for additional hours rather than add to permanent staff, then to part-time workers being hired, then ultimately to bringing back laid-off workers and/or hiring new ones.
One of the first signs of this progression is an increase in productivity, as more output is achieved with fewer workers, evident in the recent 9.5 percent quarterly productivity increase, much heralded by the markets. It should have come as no surprise, as the same amount of output by fewer employees naturally increases productivity.
But what does that mean for the markets? What does an investor do now?
The market, as measured by the Stand & Poor's 500 Index, has historically traded at a price-to-earnings ratio of 15 times. With an estimated $75 in earnings projected for the index in 2010, the index is, as this is being written, at just more than 14 times, a reasonable historic valuation.
In this foggy area, where does one look for investments? The financials and technology led the way from the panic-driven sell-off in March but are at points where they may have run out of steam. Even if financial and technology stocks hold some additional upside potential, they may not be best for the serious investor. The strong balance sheet and income statement companies - some we consider stalwarts of the American economy - were overlooked as financials and technology moved up and paid dividend yields that are well above the norm.
Sure, they are not home-run stocks, but they provide steady cash flow and the potential to increase that cash flow through raising their dividends in time.
Among this pantheon of names and their current yields are: Verizon (NYSE: VZ), 6.5 percent; Emerson Electric (NYSE: EMR), 3.3 percent; Dominion Resources (NYSE: D), 4.9 percent; Altria (NYSE: MO), 7.3 percent; Johnson & Johnson (NYSE: JNJ), 3.3 percent; FPL Group, formerly Florida Power and Light (NYSE: FPL), 3.8 percent; and PepsiCo (NYSE: PEP), 2.9 percent. This is just a sampling, and it comes with the caveat that the higher the yield and the higher the dividend is as a percentage of earnings, the less the likelihood of near-term dividend increases. Conversely, for those with lower yields and a lower percentage of earnings paid out as dividends, the greater the probability that the dividends will be increased in time. It is axiomatic that any asset - whether it is your own business, real estate, mineral properties or common stocks - will, with time, appreciate in value.
If you have behaved cautiously by keeping an inordinate amount of cash in certificates of deposit, compare the interest rates they pay with the above dividend yields. Also consider that interest is taxed at your highest rate, while dividends are taxed at a maximum of 15 percent.
Talk with your financial adviser about whether these overlooked companies are appropriate for your risk tolerance and income needs and then, should you acquire any of them, sit back and smile as the dividend checks come in.[[In-content Ad]]
Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.
