BusinessWeek has an interview with Jeremy Grantham a value manager for asset manager GMO, who has been a long time bear. He is finally ready to buy some solid blue chip companies.
'Perma-Bear' Backs Other Value Investors: Buy Now

Jeremy Grantham, chairman of Boston-based asset manager GMO, is feeling vindicated. In 1998, Grantham recalls, he forecast that in 10 years the total inflation-adjusted return of the Standard & Poor's 500-stock index would be -1.1%. In October, "it slashed through that, and marked the end of the Great Bubble," he says.

Now, Grantham, whose firm manages more than $120 billion in assets, is almost gleeful. The value manager, who earned the sobriquet "perma-bear" for his long-standing bearish outlook, is buying. Like Warren Buffett and a growing number of savvy value investors -- among them, Third Avenue Management's Marty Whitman and Longleaf Partners' Mason Hawkins -- Grantham is seeing opportunities in the cheap prices created by this autumn's rapid stock market unraveling. Stocks, Grantham says, are now cheaper than they've been since 1987. "You are looking at the best prices in 20 years, and you should be making 7% to 8% to 9% real (inflation-adjusted) returns. The last time I was this optimistic was in the summer of 1982."

Not that Grantham's blindly upbeat. "It's optimism with great trepidation," he says. That trepidation reflects the fact that Grantham doesn't know if the market will fall further. But he's not the type to try to time the bottom. In fact, he says, bubbles historically overcorrect, and usually quite dramatically. That's what happened after the stock market crash of 1929, the 1965 collapse of the Nifty Fifty, and the contraction in Japan in 1989. "We are reconciled to buying too soon," says the money manager. "A value manager buys too soon and sells too soon. That's the nature of the beast."

Values at Home and Abroad

Grantham, who is repositioning both his personal portfolio and his clients' funds, has "equal enthusiasm" for emerging markets stocks and high-quality U.S. blue chips.

Among U.S. stocks, Grantham's betting on big-cap blue chips -- the most solid of companies with strong franchises, little debt, and stable history. "I'm not personally recommending Coca-Cola (KO), or J&J (JNJ), or P&G (PG), but these are the essence of what I am talking about," says Grantham. "These super-high-quality franchise companies got left behind in what I call the 'greatest suckers' rally. They are cheap and have been cheaper than the market for a long time." Overseas, Grantham is looking at emerging markets, which are trading at around 25% off from what he considers their fair value, making them the cheapest prospects. Within emerging markets, he particularly likes Brazil. However, he's pessimistic on commodities, which he believes could be pushed to new two-year lows on slowing growth prospects in China and elsewhere.

What about financials, that most battered of battered sectors? Grantham's not as pessimistic on them as he's been previously, but he still prefers to invest elsewhere. "I don't think financials would make the list," he says, "but I think they are cheap relative to long-term expectations."

With a stomach of steel and a keen sense of history, Grantham feels no qualms about buying now: "I don't have any anxiety. I feel so much better with history on my side. Truly. I've been looking forward to this for years."

Disclosure: The Div Guy owns shares of JNJ and PG.

BusinessWeek has S&P's latest stock screen that finds 10 companies with low risk scores and strong buy recommendations from its analysts. This screen shows some very good companies with solid financials and strong dividend history.

Know Thyself

Savvy investors determine their risk tolerance before they start to invest, and then build their portfolios accordingly.

Opportunity Knocks?

By contrast, some investors may see recent market action as suggesting it's time to put new money to work. It's a risky strategy, but some investors are willing to take that risk and will not lose sleep over it.

"While painful to experience, such downturns provide better entry points for long-term investors," says Biggar. "A strategy of periodic investments at various entry points allows one to take advantage of such market disruptions."

But Biggar advises such investors to try to control the risk. He advises gravitating toward top-ranked, high-quality stocks with a "low" risk score in S&P Equity Research's Qualitative Risk Assessment (QRA).

"By definition, the low-risk QRA is only given to companies that have characteristics such as low debt-servicing profiles, minimal or no need for external financing to fund their operations, stable and diversified business lines, and strong cash flow," he says.

For this week's screen, we looked for companies ranked 5 STARS (strong buy) by S&P equity analysts, suggesting the potential for significant outperformance over the next 12 months. The also had to have a "low" Qualitative Risk Assessment score. Finally, each had to have an S&P Quality Ranking of A- or better, suggesting above-average stability of earnings and dividends over the past 10 years.

Company Ticker
Chevron CVX
Coca-Cola KO
Colgate-Palmolive CL
Cullen Frost Bankers CFR
ExxonMobil XOM
General Mills GIS
J.M. Smucker SJM
Johnson & Johnson JNJ
Procter & Gamble PG
Wal-Mart WMT

Disclosure: The Div Guy owns shares of XOM, JNJ and PG at the time of this post.

Forbes has a very interesting Q & A with portfolio manager Ralph Shive of the First Source Monogram Income Equity Fund. The article is long but here are some of the highlights along with the top 10 holdings of the fund. Dividend Investing For An Empire In Decline

Ralph Shive thinks America's best days are behind it. The country has peaked, he thinks, and is preparing for a period of bitter decay. That depressing outlook guides the longtime money manager's investment thesis: He's staying defensive, committing capital to what he sees as big, stable, safe companies.

Investors might disagree with Shive's dim view of the nation, but they can't quibble with the man's awesome performance as an investor. Shive is the lead manager of First Source Monogram Income Equity (FMIEX), a no-load fund that invests in what he deems to be undervalued stocks that pay sizable and stable dividends.

Forbes.com: Warren Buffett says it's time to buy. You agree?
Shive: Well, I am always in the market. I have had cash at about 15% going on five quarters now. So I am still concerned and defensive. The main theme here is bigger, safer and higher-quality companies. That has to be the theme when you are in a bear market. The weaker ones get wiped out. I missed most of the housing and mortgage problems, but I have problems all over the place now.

Explain your investment strategy.
I generally follow the traditional value strategy: low P/E, low price-to-cash flow. I am pretty eclectic, though. I am maybe a bit more flexible than some firms. I'm not real market-cap sensitive. Every stock doesn't need a dividend yield, but I do want my portfolio to yield well above the S&P 500.

Why do you look for companies with above-average dividend yields? What does that tell you about the company, as an investor?
You don't just buy yield for yield. People were doing that with financials. They weren't seeing the macro picture. You want the stability of the dividend. But you have to like the company and the outlook. You have a higher probability of returns with a dividend than you do with share-price appreciation.

S&P says it was the worst September for dividends since it started keeping dividend records in 1956. So, in this kind of environment, how do investors know if their dividends are safe?
It is very difficult in the financials. I have had two life-insurance companies recently reduce their dividends on me: Lincoln National and Hartford Financial Services. I have been around long enough to remember that back in the 1980s, a lot of industrials went through a tough time. Many of the industrial companies cut their dividends. This time, the center of the storm is the financials. That's the epicenter of the problem. But I feel better about consumer staples, energy and industrials. They are paying their dividends. The financial space is suspect.

Top Ten Holdings:
Johnson & Johnson (JNJ)
Allstate (ALL)
Microsoft (MFST)
General Electric (GE)
Novartis (NVS)
PepsiCo (PEP)
Abbott Labs (ABT)
Sysco (SYY)
Eli Lilly (LLY)
JP Morgan Chase (JPM)

Disclosure: The Div Guy owns shares of JNJ, GE, PEP, and ABT at the time of this post.

I will give you $32.50 for opening a Zecco Trading account and you will get a free book and 10 free trades a month courtesy of Zecco. I recently paid out bonuses to Daniel and Matthew. Zecco offers 10 free stock trades per month once you fund your account with a minimum $2,500 in equity and/or cash. You only pay $4.50 per trade after your 10 free trades that month.

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Zecco has been operating for over two years and I have been using Zecco for over a year now. I have to say I have been very pleased with my Zecco account and would recommend Zecco to anyone who wants to save money on stock trades. If you are skeptical, open an account and purchase as little as one share to see how it works.

Send an email to me at thedivguy at gmail.com and I will send you a referral link. Once you fund your account with $2,500, send me another email and then I will personally send $32.50 to your Paypal account once I am paid by Zecco. I have paid out $132.50 in bonuses over the past couple of months

Back to basics
In recessionary times, manager finds value in what consumers won't give up

SAN FRANCISCO (MarketWatch) -- The stock market's wild waves are causing seasickness for many investors, but some see current conditions as an opportune time to dive in -- as long as you've taken your Dramamine in the form of careful, daily research.

"If you're a serious investor, not a speculator, this is a great time," said Jeff Auxier, manager of the value stock-oriented Auxier Focus Fund, based in Lake Oswego, Ore.

"We're always monitoring things we want to buy, and most of the time the price is too high," he said. Not so now. Prices, obviously, are down, and Auxier sees it as a time to get strong companies on the cheap.

"You try to play defense until everyone throws the towel in -- that's when you want to be ready," Auxier said. And he's ready with his own money as well as his clients': His entire retirement nest egg is in the fund, and he promises clients he won't sell any of his own shares as long as he remains manager.

For Auxier, being ready means knowing which companies are prepared to survive and grow in the tough economic times ahead. "Those'll be the tennis balls that bounce back. The key to investing is dogged research every day," he said. "Then, this event comes and you know exactly who's got the fundamentals."

The fund (AUXFX) is off 26.3% in the 12 months through Oct. 15, versus a 42.9% average decline for the multicap-value category, according to fund-tracker Lipper Inc. On a three-year annualized basis, the fund is down 2.2% compared with an almost 9% average loss among its peers.

Philip Morris International

What's a smoker going to do in stressful times? Exactly.

Sure, Philip Morris International (PM) is a controversial investment for some, Auxier acknowledged, but the company's strengths make it a top pick now, he said.

"In this environment, we like food, beverage, tobacco. They haven't been levered up so there's not a major de-leveraging there," he said.

Another plus in the company's favor: Philip Morris International split from Altria earlier this year. "We like spin-offs. We don't like companies when they acquire, but we like when they separate," Auxier said.

Plus, Philip Morris recently expanded into China, a country with "more smokers than there are Americans in the U.S.," Auxier said, adding that the company has 16% of the global cigarette market.

"Everyone loves to hate [cigarette makers] but no one goes into the business. You don't have the waves of irrational capital that destroy industries," he said. "We like the inspired management and the uninspired industry."

The company's shares rose 14 cents to close at $43.15 on Thursday.

Unilever

Unilever Plc (UL) is another company in Auxier's sights. The maker of a variety of food and personal-care products is sitting pretty to ride out a recession, he said.

They're a "global leader," Auxier said, in food products ranging from salad dressings and margarine to ice cream, tea and beverages. Plus, he said, "they're a leader in personal-care products, especially into developing markets."

Also, the company's new chief executive, Paul Polman, spent a couple of decades at Procter & Gamble, "a very aggressive, performance-based" company, said Auxier, who expects to see the new leader push Unilever harder as well.

"It's kind of under-managed. It's got the products you want in a bad economy and it's got room for margin improvement," Auxier said.

Shares of Unilever PLC rose 34 cents on Thursday to close at $23.34.

Dr. Pepper

Are you ready to "Be a Pepper?" Auxier is, pointing to Dr. Pepper Snapple Group (DPS) , the Plano, Texas-based beverage producer, as a top pick.

"Granted the trends in soft drinks are not great, but still, in a recession environment, low-ticket disposable is better than large ticket. You're better off selling soda than cranes. It's a good time, especially if these stocks are cheap," Auxier said.

"We like enduring businesses with strong balance sheets, lots of free cash," he said. Another plus: Dr. Pepper is a recent spin-off, and that means it's likely to outperform the market over the next 12 to 18 months, he said.

And he's got other reasons for focusing on this particular bubbly beverage. "Dr. Pepper is the fastest growing carbonated soft drink in the U.S. It's real big in the South," Auxier said, "and I know Ben Bernanke drinks about five a day."

Shares of the company dropped 21 cents to close at $20.88 on Thursday.

Disclosure: The Div Guy owns shares of Unilever at the time of this post.

Here is a very good article on the benefits of dividend investing along with some solid dividend stocks to look at for your portfolio. The article is from SmartMoney and written by Jack Hough

6 Stocks Paying Generous Dividends

U.S. stocks gained more on Monday than they typically return in a year. Last week they lost nearly two years' worth of average return.

Dizzied investors trying to calculate whether stocks are now cheap won't have an easy time of it if they rely on the price/earnings ratio. Stocks are inexpensive relative to a modern, flattered definition of earnings but still a touch rich next to the traditional way of tallying earnings, warts and all. The market is an outright bargain if Wall Street analysts are right about a strong earnings recovery next year, but it's likely to languish if academics are right that earnings have further to fall in reverting to their historic percentage of gross domestic product.

Watch dividends instead, for three reasons. First, the math is easier. I can think of a dozen ways to measure earnings but only one for dividends. Also, companies that issue only broad earnings guidance or none at all often set a precise pace for dividend payments. Second, in a prolonged bear market, discouraged investors will have an easier time sticking with fat, safe dividends than clutching low P/E ratios.

Third, over long time periods, reinvested dividends make up the bulk of stock returns. That might sound counterintuitive coming off of two decades of miniscule yields and easy gains, but the past two decades have been unusual. Consider the findings of a 2002 study by Robert Arnott, former editor of Financial Analysts Journal and founder of Research Affiliates LLC, an investment firm. A dollar invested in stocks in 1802 collected an average of 4.9% a year in dividends over the next two centuries. If those dividends were spent, the dollar would have been worth $2,099, after inflation. If they were reinvested, the dollar grew to $37 million. Moreover, most of the measly growth of the first dollar occurred after 1982, as stock valuations ballooned and dividend yields shrunk.

In a separate study a year later, Arnott tackled the belief that companies that are stingy with dividends likely have better things to spend the money on. They don't, he found. Over long time periods, companies with high payouts as a percentage of profits have produced faster profit growth than those without. Far from being a sign that growth prospects have dimmed, dividends seem to demonstrate managerial confidence in the future. (In that same study Arnott noted that low payout percentages suggested coming stock returns would disappoint. Indeed, indexes are now down slightly in the five years since.)

A screen for big dividend yields right now ought to look for four other things besides. The first is plenty of free cash flow to keep those dividends paid for. The second is a modest stock price relative to income (sales) or assets (book value). (Beaten-down stocks are abundant now, so add all the frugality you like.) The last two perhaps don't lend themselves neatly to computer screening, but should affect your decisions nonetheless. Choose companies that aren't overly reliant on financing, for themselves or their customers, in case lending stays sticky for a while or consumers decide they've borrowed enough. And favor companies whose goods seem likely to keep selling well in a slow economy.

Pfizer (PFE) shares have fallen 28%, only a whisker less than the broad market, since I recommended them in January. At the time I noted that drug companies are in a difficult transition, as lucrative medicines born of chemistry gradually lose their patent exclusivity, and as biotechnology, which will spawn tomorrow's medicines, isn't yet as fertile as investors would like. Pfizer's sales could dip in 2011 when its cholesterol blockbuster Lipitor faces competition. The company's development pipeline could offset much of the potential loss, but investors don't seem especially confident, with the stock at just 7 times this year's earnings forecast.

Two things apart from the slim valuation suggest Pfizer will outperform. The first is generous research spending relative to its market value. That subtracts from today's profits but tends to add to tomorrow's. The second is the company's immodest dividend yield of more than 8%. Its size suggests investors think the company might cut payments, especially after Lipitor starts losing share. I suppose it might, but Pfizer has deep financial resources, including close to $10 billion in spare cash and well more than $10 billion more coming in each year. That's enough to afford not only dividends and share repurchases, but some promising drugs.

Have a look at all six companies that survived my screen if you like. Run it yourself anytime using SmartMoney's stock screener.

Big, Safe Dividends
Ticker Company Name Curr. Price Yield (%)
BAC Bank of America $22.79 5.62%
DOW Dow Chemical $26.09 6.44%
GE General Electric $21.00 5.90%
POM Pepco Holdings $19.51 5.54%
PFE Pfizer $16.68 7.67%
VZ Verizon Communications $28.93 6.36%

Data as of Oct. 13, 2008.

Disclosure: The Div Guy owns shares of BAC, GE and PFE at the time of this post.

Barron's has an interesting article on the benefits of Master Limited Partnerships (MLPs) by Dimitra Defotis.

How to Energize Your Portfolio
Master limited partnerships look inexpensive. And with their double-digit yields, why worry if they don't bounce back right away?

IT MAY TAKE YEARS for the shotgun marriage of Washington and Wall Street to pay off for taxpayers, who are footing the wedding bill. But some partnerships -- master limited partnerships -- are offering double-digit returns today.

MLPs, as they're called, typically invest in energy assets, such as oil fields and natural-gas processors. Most of their profits are passed along to their investors as juicy tax-deferred distributions, and the yields for many now hover near 11%. That rich payout reflects the double whammy that has hit the group -- the recent drubbing of the overall market and the sharp selloff in energy names that had preceded it, as oil prices receded from record levels.

Through Thursday, the Alerian Capital index of MLPs was down 44% this year. The good news is that as MLP prices fall, payouts rise, offering a glorious security blanket in this credit morass. And Citigroup thinks its list of 36 MLPs could produce 12-month total returns of 84%.

INVESTORS DO NEED A selective eye. Some MLPs have sold off because they're highly leveraged, while others have slid because they're directly affected by volatility in commodity prices -- which has been substantial lately. But pipeline owners, flush with income from recurring transport fees, have been unfairly dumped with their brethren.

Says Seth Glickenhaus, chief investment officer at Glickenhaus & Co., a New York money-management firm: "MLPs are getting to levels that are very, very interesting. I think their cash flows are going to continue, and at these prices you are getting very nice yields."

Where could MLPs go from here? "They have lost more than half their value in many cases, and I would say they could go up 25% easily," Glickenhaus ventures.

There has been negative sentiment about MLPs this year as hedge funds unwound energy positions. In addition, Lehman Brothers, which filed for bankruptcy in mid-September, was a lender and adviser to a handful of MLPs. As Lehman and others shed assets, lowering their value, arbitrage plays including MLPs suffered.

Glickenhaus likes three pipeline partnerships: Enterprise Products Partners (ticker: EPD), Energy Transfer Partners (ETP) and Boardwalk Pipeline Partners (BWP). Citigroup thinks the pipeline group can generate total returns of nearly 63% in the next 12 months.

Boardwalk, of Owensboro, Ky. -- which has the lowest ratio of long-term debt to capital among Glickenhaus' picks (38%) -- owns natural-gas storage fields and operates two gas pipelines in the Southeastern U.S.

At its recent quote around 16, Boardwalk looks reasonably priced, at an enterprise value (debt plus equity) of 11 times earnings before interest, taxes, depreciation and amortization -- near the Alerian index's average.

Boardwalk's shares have fallen by 48% over the past 12 months; its yield is near 11%. Citigroup expects Boardwalk to produce total returns exceeding 41% over the next year. The partnership's relatively low ratio of long-term debt to capital should serve it well in the current economic environment.

Another outfit with fee-based cash flow, El Paso Pipeline (EPB), offers a 9% yield and should produce 10% compound annual growth in distributions over the next five years, according to Wachovia Capital Markets research. El Paso Pipeline's debt level is reasonable at 54%, and Wachovia thinks the stock is worth almost double its recent price near 13.

One big plus: General partner El Paso Corp. (EP) recently dropped $971 million in pipeline assets into the partnership. A Wachovia report praised the deal, financed via a private debt placement and issuance of new units, saying it "reaffirms EPB's commitment to the MLP business model, and gives management credibility in delivering...to EPB unitholders."

For individual investors averse to filing the tax forms required annually of MLP owners, another option is owning the MLP general partner, says Timothy Call, chief investment officer at the Capital Management Corp., a Richmond, Va., investment-advisory firm. Call thinks that demand for U.S. natural-gas pipelines will increase, boosting returns for interstate operators like those controlled by ONEOK Partners (OKS). But Call prefers shares of its general partner, ONEOK (OKE), the Tulsa, Okla., natural-gas utility with a large stake in ONEOK Partners.

THE BIGGER FISH, ONEOK, buys, transports, stores and distributes natural gas. It yields 6.4%, which isn't too shabby, and its shares recently fell to a 52-week low near 26. Despite the gloom in the financial markets, analysts' 2009 earnings estimates are $3.49 a share, giving the stock a price/earnings ratio of just below eight times expected profits.

Another option: exchange-traded MLP funds. Two trade at a discount to their net asset value. The BearLinx Alerian MLP Select Index (BSR) has a 10% yield. The other, the MLP & Strategic Equity Fund (MTP), which holds a basket of energy MLPs and dabbles in forward contracts, yields near 14%.

Of course, even if the stock market stabilizes, sentiment against MLPs could stay negative if oil and gas prices waver.

But the partnerships mentioned here look inexpensive, generate steady income and offer upside potential even amid fluctuations in oil and natural-gas prices. And the idea of being paid while waiting for the stock to rise should energize some investors.

Disclosure: The Div Guy owns shares of OKE at the time of this post.

Finally some good news this week, Kinder Morgan Energy Partners (KMP) announced today that they plan to increase their November dividend.

Kinder Morgan Energy Partners Expects to Increase Quarterly Distribution Next Week to $1.02 Per Unit

HOUSTON--(BUSINESS WIRE)--Kinder Morgan Energy Partners, L.P. (NYSE:KMP - News) today announced it expects to increase its quarterly cash distribution per common unit next week to $1.02 ($4.08 annualized) from $0.99 ($3.96 annualized). This will represent an increase of 16 percent over the third quarter 2007 quarterly distribution of $0.88 ($3.52 annualized).

“While no company is 100 percent immune to external conditions, KMP continues to demonstrate that our diversified portfolio of stable assets is capable of generating consistently strong cash flow even in extremely difficult market conditions,” said Chairman and CEO Richard D. Kinder.

Kinder Morgan Management, LLC also expects to increase its quarterly distribution per unit to $1.02 ($4.08 annualized). The distribution will be paid in the form of additional KMR shares. Both KMP and KMR distributions will be payable on Nov. 14, 2008, to unitholders and shareholders of record as of Oct. 31, 2008. The company will announce its third quarter earnings at close of market on Wednesday, Oct. 15.

Kinder Morgan Energy Partners, L.P. (NYSE:KMP - News) is a leading pipeline transportation and energy storage company in North America. KMP owns an interest in or operates more than 25,000 miles of pipelines and 165 terminals. Its pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and its terminals store petroleum products and chemicals and handle bulk materials like coal and petroleum coke. KMP is also the leading provider of CO2 for enhanced oil recovery projects in North America. The general partner of KMP is owned by Knight Inc. (formerly Kinder Morgan, Inc.), a private company.

Disclosure: The Div Guy owns shares of KMP at the time of this post.

I'm sure everyone heard the shot around the world with Bank of America (BAC) cutting its dividend in half. Although I think it is very prudent of the bank to preserve capital in the current environment, is the the start of dividend cuts at other companies as well?

Some other dividend news, Hartford Financial also cut its dividend after announcing it will receive a $2.5 billion investment from Allianz, the German financial services giant. And General Growth Properties (GGP) has announced they will discontinue their dividend payments.

We will have to see how the stock market shakes out over the next few months to see if a trend emerges on dividend stocks.

Here are the highlights of the BAC dividend cut:

“These are the most difficult times for financial institutions that I have experienced in my 39 years in banking,” said Ken Lewis, BofA’s (BAC) chairman and CEO. “We believe it is prudent to raise capital to very substantial levels in this uncertain environment.”

The bank is moving aggressively to raise its capital base as it watches its crosstown rival Wachovia implode. Citigroup (C) and Wells Fargo (WFC) are fighting over troubled Wachovia.

Bank of America, considered to be one of the nation’s healthiest banks, reported a third-quarter profit of $1.18 billion, down from a profit of $3.7 billion a year ago. That works out to 15 cents a share for the most recent quarter, compared with 82 cents a share a year ago in the same period.

The quarterly dividend will be scaled back to 32 cents per share from 64 cents. CEO Ken Lewis signaled a dividend cut was coming when he told CNBC, shortly after announcing its purchase of Merrill Lynch (NYSE:MER) that everything — including the dividend — was on the table.

The lower dividend payout will be paid the day after Christmas, hitting shareholders like a lump of coal in their stockings.

But the dividend cut will keep $1.4 billion in the company’s coffers each quarter.

The Charlotte, N.C., bank also said it plans to raise $10 billion in a common stock offering.

BofA is preparing for darker days ahead as the economic slowdown boosts credit losses.

“We believe that achieving higher capital levels today will position our company to provide credit to those consumers and businesses that are attracted to our strength and stability,” Lewis said.

Disclosure: The Div Guy owns shares of BAC at the time of this post.

BusinessWeek has an interesting article on not panicking in today's volatile markets by Roben Farzad and Tara Kalwarski

To many panicky investors, it feels like financial Armageddon. But decades worth of investing precedent suggest otherwise. And investors who bail on stocks now might come to regret it.

Make no mistake: The freeze in the credit markets is frightening. "People don't have any experience with this kind of thing happening," says Martin Barnes, managing editor of Bank Credit Analyst. "People can't look back at previous episodes and take comfort and say, 'I've been here before.'" And so, almost by default, we are given to extreme bearishness—invoking the Great Depression and Japan's lost decade is all the rage. "Sure, these things are possible," says Barnes. "But not likely."

Sept. 29's 778-point drop on the Dow doesn't even rank among the top 10 in percentage terms—it was 7%, compared with 22.6% in 1987. Yet the very system that rewarded risk taking for years is now holed up in the closet under a security blanket. Hedge fund traders, banks, individual investors, small businesses—you name it—have been piling into ultrasafe short-term Treasuries, which now yield close to 0%.

We've felt the sky was falling before. Recall that one-day panic on Oct. 19, 1987, or the savings and loan crisis of the early 1990s, or the Asian meltdown in 1997, when Koreans lined up on the streets of Seoul to donate jewelry to shore up their currency. The markets took big hits in all of those cases, but ultimately bounced back. By the beginning of 1989, for example, the Dow had returned to its pre-crash levels.

The smart money knows that banking crises are par for the course. According to the International Monetary Fund, the past quarter century has seen at least 124 banking crises around the world. "It is important to recognize that this isn't the first time the U.S. financial system has experienced—and survived—a financial crisis," says Eric Bjorgen of Minneapolis-based Leuthold Group, an investment research firm.

BARGAIN INTERNATIONAL STOCKS
The time to panic, if there ever was one, was a year ago, when stocks were hitting their highs—not now, when they are hitting their lows. Today's extreme bunker mentality has the stock market looking cheaper relative to Treasury bonds than it has since 1978.

That's precisely the environment in which savvy, patient investors make their fortunes. Case in point: legendary cheapskate Marty Whitman of Third Avenue Funds, an octogenarian who lives for volatile times like these. "Right now is a time when deep value investors excel," he says. "People like myself got rich in '74 and '87, unlike those who tried to pick bottoms." The common stocks of companies that need access to capital markets are "toast," he says. "The common stocks of companies that can finance themselves have never been more attractive."

Whitman says that many international shares in particular have never looked so cheap: "There are unbelievable bargains. It's terrific for us." Stocks he thinks are especially cheap include Hong Kong-based real estate investment holding companies, including Cheung Kong Holdings, Hang Lung Group, Henderson Land Development, and Wharf Holdings.

Even Rob Arnott, chairman of investment advisory firm Research Affiliates and a bear long before it became fashionable, says the current panic "is creating some really spectacular opportunities for those who are nimble and weren't overly aggressive." The reaction in financial-services stocks is overdone, he says. "We have an anti-bubble—when a sector of the market falls to levels that no plausible scenario would justify." Arnott also sees "great bargains" in convertible bonds and says the debt of "many emerging markets is more creditworthy than U.S. Treasuries". The broad U.S. stock market, however, has a chance of falling further as consumers begin tightening purse strings, he says. Arnott thinks investors should lower their long-term expectations of stock returns to about 6%.

Of course, bargain-hunting always sounds great in theory. But people have shown time and again a predilection to sell low—just as they tend to buy high. Princeton economics professor Burton Malkiel, author of the best-seller A Random Walk Down Wall Street, notes how much hot money piled into equity funds in early 2000, just as the market was about to peak. Then, as stocks were nearing the bottom in the third quarter of 2002, that money fled in droves. The timing couldn't have been worse. "One of the things we know about individual decisions in markets is that people generally do the wrong thing," he says. "I know money is coming out now. I don't know whether this is the bottom. But taking money out now, when things look horrible, is almost always the wrong thing to do."

Disclosure: The Div Guy does not own any stocks in this article at the time of this post.

My Annualized Dividend Income increased to $10,334 from $9,909 for the month of September. This means my dividend stocks will pay $10,334 in dividends over the next 12 months. I have passed my updated 2008 Dividend Income goal of $10,200 in yearly dividend income. I made additional purchases to our dividend stocks this month and I also used a 0% credit card offer for additional purchases towards the end of September. I did not have any dividend increases that were paid this month. My stock purchases will be smaller for the rest of the year and dividend income should not increase much.

Most of my stocks are held in my Zecco Trading account and the rest are DRIPs. The dividends from my stocks are reinvested but I am keeping track of the amount of income I could receive once I retire.

As of the end of September our Net Worth decreased to $735,643 from $776,899 for the month which is a 5.31% decrease.

The breakout is as follows:
ASSETS
Retirement Accounts $337,033
Taxable Accounts $120,230
Cash $38,244
Home $205,000
Cars $14,500
Personal Property $3,000
Kids 529 Accounts $24,036


DEBT
Credit Card $6,400

Here is the summary for the month:

Our Net Worth decreased by over 5%, most of which is from the drop in the stock market. I made additional purchases to our dividend stocks this month using the last of extra cash on September 29th. I also shifted some money on the 29th out of bonds mutual funds and into stock mutual funds. You can click on my Net Worth graph on the right to see the changes in each category from the previous month. I continued funding our Roth IRA's this month. I am keeping a high level of cash that I will use to fully fund our Roth IRAs for 2008 and 2009. I also have a savings account to fund the replacement of my wife's car in a couple of years. This is the first time in a while that I have a credit card debt but I will pay the card off in 12 months with no interest.

I will post my Dividend Income Update on Thursday which is much more upbeat.