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Accidental Yield In Sight

|Includes:CTL, DUK, FE, McDonald's Corporation (MCD), MDLZ, MRK, NLY, T
With the massive selloff in the stock markets further rattling investors, many are wondering, what's next, or where can they go? While it's easier to weather the storm if prudent plans have already diversified your portfolio, whatever your investment style or approach, when the market calms down-and it will-it's time to look around. In assessing where you go from here as an investor, one of the things to offer up in these troubled investing waters is a look again at dividends.

No, dividend stocks weren't immune from the market selloff and they won't be again, but if we look further at dividend payers, one of the things we already know is they don't usually fall as much as other stocks and they often rebound better. This varies individually, of course, with the equity, but it's a principle we've written about before. But there's more to this story than merely buying a handful of dividend payers and stuffing them into your portfolio. We want to look at how yield is affected when the market goes awry as it has.

Selling Because Of Selling

It seems almost axiomatic to say this, but with so much stock market action now based on short term trading and technical matters such as charting moving day averages and so on, fundamentals are on the back burner. It doesn't mean they're not important, as they are extremely important. But what technical analysis does is essentially monitor price action, that is, it tells you whether the market is buying or selling en masse, whether it's a particular market or stock. The technicals are the eyes on whether the market is accumulating or distributing, simply meaning buying or selling, a stock or the bulk of stocks. So when price action trends heavily one way, such as the recent selling, it encourages more selling and more willing sellers. One corollary development of stock prices being driven down, though, is that their yields are driven up.

The major averages fell in tandem roughly10% in five days, driving share prices down and yields up.

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Rising Yields

When you have such a dramatic sell off as we've recently had, one of the last things investors may notice is how yields are moving. This is understandable, as we are all busy trying to figure out how to deal with falling share prices. But check on even some of the mundane, big name blue chips, which pay mostly modest dividends. During the sell off, McDonald's (NYSE: MCD), whose share price had held up very well considering the carnage, fell to the low $80s, and was yielding nearly 3%. Kraft Foods (NYSE: KFT), another supposedly dull dividend payer, saw its yield reach the 3.4% mark. These aren't bad yields for solid blue-chippers whose stock prices held up relatively well in the market. Better yet, a pharma company such as Merck (NYSE: MRK), saw its yield pushed to 5%. Not a bad payout.

Utilities Still Payoff Well

How about utilities? Those stalwart dividend payers, such as Duke Energy (NYSE: DUK), saw a share price drop toward the lower end of its 52-week range to $17.48, which drove its yield up to 5.8%. First Energy Corp. (NYSE: FE), another major utility, carried a yield of 5.6% as the selling drove share prices down. These are considerable yields for such supposedly vanilla utility stocks. Their yields moved from the medium end toward higher yield territory. And these companies still have strong fundamental business prospects underlying their dividends, even in this slow economy.

Accidental High Yield

Popular tv investment guru Jim Cramer among others has talked about the concept of the accidental high yielder. This is a stock whose share price has been taken down usually in a general market selloff and through no fundamental event attributable to the company's business prospects. The dividend yield is then pushed up to an attractive level, or an even more attractive level, without the company even raising the payout. If investors have kept some of their powder dry, that is some cash available, for after market selloffs when the smoke clears, then searching for some of these accidental high yielders can be profitable.

The Ordinary Becomes Outstanding

AT & T (NYSE: T), which is a staple if not a bulwark of many investors' dividend portions of their portfolios, is one such example of an accidental high yielder. The market selloff pushed its yield over the 6% mark, to 6.1% at one time. This is for an already good dividend payer that has been performing fairly well on the earnings front as well. Given the concurrent Treasury bond rates, if you bought a 10 year bond, that would only yield 2.35%. So AT & T, a low beta stock, has entered the high yield territory accidentally.

Five Days of the selloff: AT & T's share price driven down, causing yield to rise.

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High Yields Become Higher Yields

If you are fortunate enough to have shopped around for some higher yielding equities, say some of the other telecoms, for example, Century Link (NYSE: CTL), it had its already high 8% plus yield pushed to nearly 9%. Some stocks which yielded around 10% before the market selloff go their yields boosted also. Annaly Capital Management (NYSE: NLY), the well known mortgage REIT, had its yield cross the 15% mark, though of course it was yielding more than 14% to begin with. Still, in addition to the yields going higher, investors will find many dividend stocks they looked at before will be worth a second look. Often market selloffs finally run out of steam when dividend investors, attuned to bargain hunting, step in and astutely pick off some gems.

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