The Federal Open Market Committee of the Federal Reserve decided to keep rates at their historical low levels. While the economy grew, the FOMC still appears concerned with unemployment above 9% and the continually lethargic housing sector. These factors may have a dampening effect on the strong consumer spending. Due to the Fed keeping rates stable, businesses should continue to benefit from low borrowing costs.

Protests spread across North Africa and the Middle East in January, with the primary focus on Egypt. While the broad U.S. markets tended to shrug off the news, investors still paid close attention to the situation. If protests continue to intensify and the political situation destabilizes, it is possible the strategically important Suez Canal could be affected. A significant amount of oil passes through the canal each day.

STOCK MARKET PERFORMANCE

Overall, the month of January 2011 was strong for stocks. The Dow Jones Industrial Average returned 2.85% for the month, while the broader S&P 500 Index gained 2.37%. The Nasdaq Composite Index, heavily weighted by technology-based companies, increased by 1.78% for the month. Large US equities produced the best January in recent years.

BEST PERFORMING STOCKS

NVIDIA Corporation (NVDA)
This video-chip maker was up 59.6% for the month due to strong earnings and legal settlements. NVIDIA agreed to settle its legal action against rival chipmaker Intel for $1.5 billion and have signed a cross-licensing agreement to hopefully avoid future disputes. NVIDIA also announced plans to produce central processors for PCs, expanding upon its core graphic chip operations.

Micron Technologies (MU)
Continuing with the theme of chipmakers, Micron Technologies rose 33.4% in January. Strong investor optimism fueled by positive analyst ratings and upgrades brought buyers into the market for Micron shares. Many analysts cited a stronger environment for technology and forecasted more stable pricing for chips, which investors believe will lead to strong earnings for Micron in the future.

Valeant Pharmaceuticals International (VRX)
Valeant stock returned 29.5% in January due primarily to strong company guidance for 2011. The firm projected earnings for the current year which were far above analyst expectations, causing many to upgrade their rating on the company. The stock may have also gained in anticipation of a merger announced on February 1st in which Valeant agreed to purchase rival company PharmaSwiss, a move applauded by investors.

Intuitive Surgical (ISRG)
Intuitive Surgical stock jumped significantly as the company announced 4th quarter earnings which far exceeded investor expectations. Net income rose to $3.02 per share, outpacing the $1.95 per share from the previous year and eclipsing expectations of $2.25 per share. This maker of robotic medical equipment forecasted continued strong demand for its da Vinci Surgical System. Shares rose 25.7%.

Marathon Oil (MRO)
Rising oil prices were not the only reason for investors to buy shares of Marathon. The large oil company announced plans to spin off its large oil refinery business operations and will focus its efforts on oil and gas exploration. Analysts have long considered the refinery segment the weakest part of the Marathon portfolio, and by separating the operations from the parent company, investors are hoping for better earnings performance. Marathon stock improved by 24% in January.

Consistent Payout

Investors may find dividend payments to be their game-changer in a depressed stock market. While no one can be certain what kind of market tomorrow will bring, a consistent flow of dividend payments provides a hedge against losing all value with a sudden shock to the market. Of course, if a company does not have a good quarter, they will not have a dividend to pay out. However, many corporations have a proven record of sending consistent paychecks and providing profits a step ahead of inflation. Some of these include companies with a record of paying dividends regularly for the past 25 years.

Dividend Increases

While increasing the number of dividend-paying stocks in one’s portfolio will not make an investor filthy rich, it will prove to be a double win in most cases. Taking dividends does not mean one compromises stock valuation. Most companies in strong industries, such as utilities for example, maintain an attractive yield as their stock price and dividends typically grow at a matched pace each year. These benefits make dividends attractive to those close to retirement or already retired, since they have continual cash flow without compromising their net worth. This strategy has begun to appeal to a wide variety of investors with the unpredictable market and growing inflation.

Hedge Against Inflation

A well-chosen selection of dividend-paying stocks will help an investor hedge against inflation. While many have thought of bonds as the fail-safe investment strategy, many investment experts encourage their clients to consider the advantages of dividends. Bonds can often reflect a weak economy, but dividends have a record of keeping ahead of inflation, outperforming bonds on a 15-year comparison, and giving the investor a little peace of mind in a turbulent market. However, should the market pick up, dividends do well in a bull market also. With the high numbers of baby boomers looking to the stock market for retirement solutions, the dividend-paying companies are becoming an important buffer for many portfolios.

Assume the five year average yield is 9%. At $5.00, with 60 cents per share annual dividend, this stock would be undervalued since its yield is above its five year average. If the price rose to $6.00, the yield would be 10%, still above the five year average. Once the price rose to $6.60 the yield would be .6 / 6.60 = 9% and this stock wouldn’t be undervalued.

Why Prices on These Stocks Go Up

Investors like undervalued dividend stocks because they get a good yield on their investment, with the potential for capital gain. As they start buying, the price starts to rise. This attracts the attention of momentum investors who jump aboard when they see the price “taking off”, which also contributes to the rise in the price. Eventually, after the price rises high enough, the yield has declined to the point where it goes below the five year average. Sometimes the run up in prices is extended if the company continues to increase its dividend, but few companies are able to do that.

What Goes Up Must Come Down

Once the price goes so high that the dividend yield drops below the five year average. The stock has now become overvalued. New buying will slow. The momentum investors will start selling once momentum stops. The dividend yield investors each have to make their decision on whether to cash out or stay, but the majority will cash out since their rational for buying the stock has gone. All this selling will, of course, bring the price down.

The dividends of these prime stocks have been raised every year for over 25 years. Each is considered a safe dividend income investment. Currently, there are 42 stocks on the Dividend Aristocrats list; all of them have consistently raised their dividend each year for a quarter century.

The highest yielding Dividend Aristocrats

The average dividend yield of all 42 stocks on the Dividend Aristocrats is 2.65%. However, the five stocks with the highest dividend yields on the Dividend Aristocrats all post yields of over 4%, and are extremely profitable, trustworthy companies.

1) Century Link Inc. (CTL) is currently the highest yielding stock with a 6.30% dividend yield. A telecommunications stock with a market cap of 14 billion, it has dispensed a consistently hefty dividend.

2) Pitney Bowes (PBI), a mail service company with a 4.9 billion market cap, has a current dividend yield of 6.05%.

3) Cincinnati Financial Corporation (CINF), an insurance provider at 5.2 billion market capitalization, has a 5% yield.

4) Consolidated Edison Inc. (ED), a holding company with 14.3 billion market cap, has a dividend yield of 4.80%.

5) The 4.70% yield of Leggett and Platt (LEG), a device-building company with a market capitalization of 3.4 billion, makes it a very worthwhile investment.

Importance of the 25 year benchmark

Although the prices of dividend stocks tend not to rise dramatically, the best dividend stocks are reliable, with profitable yields. The Dividend Aristocrats are committed to offering a dividend, raising it every year to keep their loyal investors happy. They have grown so large that the most profitable way to profit the shareholders is to offer the cash dividend, a process usually done quarterly. Consequently, they are considered the most dependable dividend stocks on the Exchange.

Many companies offer dividends, but not consistently. These companies are not stable. The board of a such a company may increase the dividend to entice investors, and then promptly lower it the following year. A dividend aristocrat company having increased its dividend for a quarter century makes it a safe dividend income investment.

Common stocks
Even the casual investor is familiar with common stock. Essentially, owning common stock in a company is like owning a part of the company. With it comes the right to claim quarterly and annual dividends. These dividends are based on quarterly profit declarations and are paid out to all common stock shareholders. While the dividends aren’t guaranteed, they are still a solid source of quarterly returns for investors. Sometimes those dividends are high, while other times they are low. With common stocks comes the opportunity to vote on company wide decisions concerning investment, electing board members of the company and other major decisions. A common rule of thumb is one vote per share owned. When it comes to discussing stocks, most people are referring to common shares.

Preferred stock
Preferred shares are similar to common shares and involve some aspect of ownership. However, in the case of preferred stock, owners don’t typically have the same level of power in terms of their voting ability. In fact, most preferred stock doesn’t allow any rights when it comes to voting on key company wide issues. The benefit of preferred stock is that it provides a guaranteed dividend for the duration the stock is held. However, this dividend is typically much smaller than common share dividends. In this case, preferred shares provide investors with consistent income. Another added benefit is that if the company becomes insolvent, it’s the preferred shareholders that are reimbursed before common share holders.

When considering investing in stocks make sure to match your risk level with the type of stock purchased. Do your research and due diligence. Be sure to understand what you are getting into and never purchase stock in a company you’re not entirely comfortable with. Most importantly, stay committed and try to ignore those temporary market downturns. Over time, the return is worth the investment.

Search
When searching for undervalued stocks, an investor hopes that the market will eventually identify the correct value of the stock and realize it’s full market value. Finding this type of stock requires an investor to stay in touch with market trends, be in tune with market cycles, and be able to act with a matter of determination.
An astute investor knows that to find good deals requires familiarity with companies they have an interest in. Researching a company’s financial history, as well as any debts they may have, will give a realistic view of the services and products they offer. Their record of earning and profit over the years will give an excellent indication if the numbers are on the way up, as well as barriers that might prevent any competition from getting an immediate foothold in their market. This coupled with the fact that they may have a service or component that might benefit in a new technology or marketplace will give distinct clues as to their real worth. A sharp investor will see these clues before the general marketplace does.

Evaluation
No less an authority than stock guru Warren Buffett has said that “the value of a business is the sum of the cash flows over the life of the business discounted at an appropriate interest rate.” Simply put, this means that an investor wouldn’t be able to predict a certain stock is undervalued unless their homework is done to make sure it has a good chance of future profits and interest rates to match. It is imperative that when researching the market an investor is somewhat certain that a company has what it takes for a future profit. This will help determine if it is an undervalued stock candidate.

P/E
High growth stocks may have a high P/E ratio because they are expected to grow rapidly over the next few years. Look for P/E ratios that are less than the market average for a high growth company to find a winning stock.

If you practice the art of buying undervalued cheap stocks in a wise manner then you will be as safe as you can be in the ever changing world of stock investing.

HOW BANK STOCKS PAY DIVIDENDS:

While recent troubling events in the American economy have generated negative feelings towards banks and mortgage lenders, banks are generally the safest companies in which to invest. The banks make their money primarily from the interest they collect on loans, such as mortgages, to a broad range of customers. Credit card loans and personal loans also provide the banks with the funds they need to grow business and produce healthy dividends for shareholders. A few years ago, some banks faced the grim repercussions of giving out extensive sub prime loans: speculative loans to customers with a high risk of defaulting. Despite the greediness of some banking officials who approved those sub prime loans, many leaders of other upstanding banking firms were not beguiled by the “housing bubble”, as it was called. Some banks have maintained a dividend for their investors for years, giving out intelligent loans and continuing to create a profitable income stream.

DIVIDENDS THEN AND NOW:

Although bank stocks pay dividends, tough economic times will drive dividend rates down. When too few people are taking loans from banks, the banking business suffers and offering a healthy dividend becomes difficult for even the most solvent firm. Today, some bank stocks that sported a 3% dividend yield five years ago now have a 1% yield.

CONCLUSION

The American economy is resilient. As employment increases, more financially solvent people will be looking to take out loans from banks. With a new influx of funds, these banks will have to raise their dividends to stay competitive, and the average dividend yield will most likely match the healthy yield of five years ago.

This particular stock has been very volatile over the past year, from a low of around $17 to a high of around $43. The stock appears to be on an upswing. The price has recovered with the overall market and sales and earnings are both up relative to a year ago.

John Mackey, CEO, stated in the most recent quarterly earnings report that the business has come out of the recession with a better balance sheet as well as a more disciplined approach to capital spending. Newly-opened Whole Foods stores are performing well. The company is trying to increase its per square foot. As the economy improves and customers have more disposable income to spend, Whole Foods should benefit too.

Unfortunately for all of us dividend investors, Whole foods cut their dividend in 2008.