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Safe Havens: High-yield stocks
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October 18, 2001: 11:32 a.m. ET
Companies that pay healthy dividends offer two ways to win.
By Lisa Gibbs and Jeff Nash
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NEW YORK (CNNmoney) - Few folks gave a hoot about dividends during the 1990s bull run. But here's a key fact: Between 1926 and 1997, dividends provided 4.6 percentage points of the stock market's 10.6 percent average annualized return. In bear markets, stocks with high dividend yields become even more desirable because they deliver real downside protection.
Classic high-yield plays include electric utilities and real estate investment trusts, or REITs. Remember, though, that utilities are not the stodgy investments they once were. Deregulation in recent years has allowed many of the nation's power companies to compete -- and possibly fail -- on the open market.
Electricity use drops during recessions, of course, but in the end it's a lot like food -- it's hardly a discretionary expense. Reliant Energy (REI: down $0.31 to $28.02, Research, Estimates) not only pays a 5.8 percent yield (short-term Treasury notes now yield less than 3 percent), it looks undervalued right now.
The Houston company has a mix of regulated operations and fast-growth businesses, such as power generation and trading, which should help it increase earnings by 10 percent over the next few years. (This follows a three-year streak of 21 percent annualized growth, generated by Reliant's snapping up power plants in Texas, California and the Northeast.) Reliant recently traded at $26, or less than nine times next year's estimated earnings.
REITs must, by law, pay out 95 percent of their income in dividends. Although certain kinds of real estate development may be seriously hurt by the slowing economy, we think apartments are less vulnerable because residents may delay home purchases.
The dominant apartment REIT is Equity Residential Properties Trust (EQR: down $1.05 to $24.95, Research, Estimates) , up 10 percent since we recommended it in July, and we still think it's one of the best choices for safety-minded investors. Stakes in nearly 1,100 properties in 35 states hedge against problems in any single region, and its size brings it savings on bulk purchases of everything from concrete to insurance. Says CGM Realty manager Ken Heebner: "It's yielding 6 percent, trading at 10 times FFO [funds from operation, the standard measure of REIT cash flow], it's diversified and I think you'll see 5 percent to 10 percent annual growth in FFO."
Dividend-rich tobacco stocks have long suffered from political worries and the threat of smoking-related lawsuits. Yet S&P's tobacco index has returned 15 percent so far this year--35 percentage points more than the 500. Tobacco's trump card: Its customers are addicts, even during (and maybe especially during) a recession. Philip Morris (MO: up $0.51 to $50.42, Research, Estimates) is the dominant global brand, but we're recommending British American Tobacco (BTI: up $0.02 to $16.82, Research, Estimates) , traded on the American Stock Exchange as an ADR. It pays a higher dividend, 5.1 percent to Philip Morris' 4.7 percent, and its London base and smaller U.S. business make it less vulnerable to lawsuits. "Having less exposure to the U.S. is the key," says David Winters, chief investment officer for Mutual Series funds. Maker of Kool and Lucky Strike, British American has 15 percent of the world cigarette business and 12 percent of the U.S. market. 
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OTHER SAFE HAVENS
