March 24, 2008 11:30AM

Best Safe Haven Stocks Now

By Elizabeth MacDonald

You’re crazed about your stock portfolio now, because it seems like the economy is headed for a national nervous breakdown, right? A systemic credit crunch is underway, record bank writedowns are rocking the stock market, inflation is eating away at returns, and the euro, the Canadian loonie, the Japanese yen, all are flexing their muscles at record levels against the dollar.

What stocks could be safe havens now?

How about some stocks that throw off dividends?

It’s good to get both a stock that throws off decent returns and a dividend, when the dollar is toboggan sledding down like never before. I tend to like dividends for a variety of reasons. Number one, you get an income tax deduction on your dividend payouts. Plus dividends in most cases can be great proof that a company is doing pretty decently–else how could they have the cash flow to pay out the dividend?

But you want dividend stocks that are backed by solid quality of earnings. I asked Sageworks, a financial research firm in Research Triangle Park, NC, to pull together a list of the companies that it thinks have pretty solid quality of earnings that also throw off nice dividends. The companies below have decent liquidity, real cash, plus they are not overleveraged with debt, says Brian Hamilton, head of Sageworks. Here they are:

Of course, don’t expect dividends to last at the banks pounded by the credit crisis.

But watch what happens at the mere suggestion that dividends should be cut at these institutions–which is why they have been holding onto their dividends in a tight crab grip.

The largest U.S. banks saw their stock prices recently drop after remarks by Treasury Secretary Henry Paulson suggesting that banks may need to suspend dividend payments in order to shore up capital. “We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies,” Paulson said. After those remarks, JP Morgan Chase (JPM) soon dropped 4.43%, Bank of America (BAC) was down 3.56%, Citigroup (C) fell more than 5%, Washington Mutual fell almost 5% and Wells Fargo dropped 4%.

Paulson is essentially saying that banks should cut their dividends and instead use that money to plug the holes in their balance sheets blown out by record write downs from the credit crisis, totaling about $180bn so far. That’s a lot of dividend money that could be cut out of investors’ wallets–one report has it that the banks shelled out more than $110bn in cash dividends last year, up nearly 18% from 2006.

Banks are already slashing dividends. Washington Mutual (WM) has cut its dividend. Citigroup (C) cut its dividend by 40% last January, but it’s still paying out $1.28 a share this year, or $6bn it may need to plug some balance sheet holes. Mortgage financing giants Fannie Mae (FRM) and Freddie Mac (FRE) have slashed their dividends as well, to stabilize their balance sheets. Freddie Mac (FRE) cut its dividend on its common stock by 50% in November, but it still pays $1 annually or $650mn.

You don’t see brokerage firms listed on this table, because they tend to pay tiny dividends if at all. Brokerages tend to pay out a lot of their earnings towards year-end bonuses, so a 1% to a 2% yield is quite high for these guys.

There are other dividend plays to look at, too. Consolidated Edison (ED) has a nice 5.7% yield and is an evergreen in the business of power supply. US energy trusts are good, too, because they tend to pay out almost all their income to avoid paying taxes, plus oil prices are likely to remain high. Check out the Permian Basin Trust (PBT), a mix between oil and gas companies with a 12% yield.

Some companies, I think, would do well to raise their dividends. I agree with analysts who point to cash rich and dividend cheap tech companies, even those doing stock buybacks, as dividend announcements can be good for stock prices. Watch what happened to AT&T (T) when it raised its dividend recently and upped its share buy-back. The company’s stock rose almost 9% on the news, the most in five years.

Apple (AAPL) has piled up about $18.4bn of cash and equivalents as well as short-term investments on the balance sheet. Since it hardly ever buys other companies, some say it could probably afford a $6 or $7 special dividend, an announcement which might help its stock, beaten up of late.

Cisco (CSCO) can afford a 3% yield, analysts say, with its shares declining in value. Other profit machines can afford to boost their dividends. Exxon Mobil (XOM), the most profitable company in history, cheaps out with a yield of 1.5%. Don’t you think it can afford to more than double that amount to 4%?