Visions, February 25, 2012

Saturday, February 25, 2012 | VISIONS - Family, Health & Wealth | Page 2

Try, TryAGAIN

LOOK FOR SPECIFIC TIPS ON PAGE 8.



anticipate theyear to proceedwith a steadybeat, building

up to a crescendo bythird quarter 2012.

The consensusrarely triumphs in theequity markets.

To most, it seemsincomprehensible, par-ticularly given multipleheadwinds in the U.S.and in Europe, thatmarket valuations canexpand this year —and, as I have submit-ted, that the S&P 500can approach itsMarch 2000 high ofaround 1550 this yearand even exceed itsprevious all-time highreached on October

2007 of around 1576by early 2013.

Domestic and non-U.S. concerns areknown, will not likelybe discounted againand, importantly, willlikely diminish in consequence. Marketstypically fall or rise(sharply) on the unexpected.

Our fiscal imbal-ances and those of ourcounterparts are moreappreciated than theywere a year ago, whenthere was almost uni-versal agreement (bythe Fed, Wall Streetstrategists, etc.) of anormal duration (tohistory) and selfsus-taining economic

cycle. That optimismwas incorporated in aconsensus

15 percent to 20percent gain for theU.S. stock market andproved incorrect. Goodtimes (late 2010) mor-phed into worseningtimes last year, as eco-nomic growth expecta-tions failed to be real-ized and were markeddown. With the bene-fit of hindsight thisprovided a strongheadwind to stockprices in 2011.

Negatives havebeen sufficiently dis-counted. The S&P 500now trades at only12.2 times estimated2012 earnings consen-

sus, 3 multiple pointsbelow the last 50 years'average (when theyield on the 10-yearU.S. note approached6.70 percent) and near-ly 7 multiple pointsbelow times in historywhen interest rates andinflationary expecta-tions were similar. Theconsensus, upbeat 12months ago, is nowdownbeat.

A market crescendo

will build throughout2012. I expect that U.S.share prices will slowlyclimb the wall ofworry in the first halfof the year as theEuropean crisis stabi-lizes, owing to a grow-ing commitment byEuropean leaders andcentral bankers to dowhatever is necessaryto avoid the unimagin-able.

At the same time,

high-frequency domes-tic economic statisticswill likely continue togradually improve, ledby surprising strengthin housing and auto-mobile industry sales.

In summary,investors were non-plussed in 2011, butthe outlook for 2012 islikely to turn positiveby the second half.

Doug KassHedge fund manager Doug Kass is the

marquee contributor to TheStreet’s RealMoney

Pro subscription investing service.

IA market crescendo in 2012

Someone asked why a friend oftheirs who is a 401(k) participanthas stayed auto-enrolled at 3 per -cent instead of maxing out theircontributions. The stereotype is thateveryone should max out their 401(k)contributions, and they certainly havebenefits:

• Asset protection from lawsuits,depending on complex rules.

• Encouragement to avoid spending savings.

• Encouragement to save for retirement.

• Shifting income into futureyears, when retirees are likely in a lower tax bracket.

But hear the other side of the story.There are reasons against 401(k) contributions:✘ Retirement accounts create prob-lems, including double taxation at

up to 85 percent for people wealthyenough to have to pay estate tax.✘ People who want to start a busi-ness or buy a home — for whichlarge down payments may berequired — need access to theirfunds.✘ If long-term capital gains or U.S.Treasury income (U.S. Treasury inter-est is free of state income tax) is gen-erated in a tax-deferred retirementaccount, they lose their special taxstatus and, when withdrawn fromthe account, are taxed as ordinaryincome.✘ Capital gains taxes are waived byusing basis step-up at death for assetsin a taxable account, but not in aretirement account.

Of course, if someone can get anemployer match, they should partic-ipate and get it. Probably the sim-

plest explanation why someone con-tributed 3 percent is that they weretoo poor to save; for a person in a 15percent tax bracket, the tax savingsis not that appealing as simply get-ting enough current spendableincome to buy the basic necessities.

Generally, the reasons against a401(k) are applicable only to peoplewealthy

enough to pay estate tax. But withinflation and a need to raise taxes, itis possible that in a few decades, peo-ple in the middle class will comeclose to paying estate taxes. Thatwould depend on how long they liveand what excessive medical coststhey encounter, assuming Medicarein the distant future has huge"means testing" fees.


Pros and cons of 401(k)s By Don Martin, The Street

Maximum contributions are not always good


hen it comes to theDow Jones IndustrialAverage, time andtechnology stocksmake fools of us all.

So, dear reader, if you're approach-ing this article with a healthy doseof skepticism: good. Nobody cantell the future, certainly not thisauthor — rather, the followingstock picks are modeled using acombination of arithmetic and his-torical precedent. If you're interest-ed in seeing how my past Dowpicks have fared, skip to the end ofthis article. I hold my feet to thefire.

In attempting to identify the bestDow dividend stocks for 2012, hereare the criteria I've used:

1.) Each stock must have a liabili-ty-adjusted cash flow yield* 1.5times greater than the yield of a 10-year U.S. Treasury note.

2.) Each stock must have a returnon invested capital greater than 10percent (using five-year historicalcash flows).

3.) Each stock must show a positive total return (including dividends) over the past 10 years.

4.) The dividend yield of the stockmust be less than the liability-adjusted cash flow yield. In otherwords, cash flow must support thedividend.

Remember, this list is constructedusing only quantitative criteria (inother words, strictly by the num-bers). That said, a little color hasbeen added to each of the compa-nies mentioned, which are orderedfrom most expensive to least.

As always, model portfoliosshould not be treated as gospel;rather, use them as a starting pointfor your own research. Similarly, allinvestors should apply their own-

valuation and qualitative criteria todetermine what constitutes a "goodbuy."

*5-Year Average Free Cash Flow /((Outstanding Shares x Per Share

Price) + (Liabilities - Cash)) — Freecash flow data is sourced from eachrespective company's annual filing.Outstanding shares and asset/liabili-ty data is sourced from each respec-tive company's most recent quarter-ly filing.Flow /((Outstanding Sharesx Per Share Price) +(Liabilities -Cash)) — Free cash flow dataissourced from each respective com-pany'sannual filing. Outstandingshares andasset/liability data issourced from eachrespective compa-ny's most recent quar-terly filing.

WEye on the Market

Four good Dow dividend stocks

for 2012...

By John DeFeo, The Street



TRY, TRY AGAIN... Continued from page 2.


By Jeanine SkowronskiMainStreet (part of The Street Network)

Take some credit8 common credit score myths debunked

Paying on time guarantees a good score Paying your bills on time is an important component toyour credit score, but it's not a surefire way to a perfectscore, especially if you're rone to bumping up againstyour credit limits before making a payment.In addition to payment history, "credit bureaus see thebalance on your last statement," says Adrian Nazari, CEOof Credit Sesame. If this balance is extremelyhigh, it can negatively affect your credit utilization ratio— the amount of credit you are using versus theamount of credit you have available to you — and cancost you some points in that category. This is why it's agood idea to "pay (your issuer) afew days ahead of your credit card statement date,"Nazari says, which will ensure a low balance gets report-ed to the bureaus each month.

You should cut up the cards you don't use Those who have accumulated significant debt may beinclined to close credit card accounts as they pay themdown, but doing so may hurt your score — in a fewways. "You risk lowering your credit utilization ratio," Nazarisays. Instead of cutting up unused cards if customersconsistently bump up against their credit limits, Nazariadds, it is better to keep your cards open and restrictuse to one or two small payments a year to keep yourutilization ratio intact and your payment history stellar.

MYTH1

MYTH2

Credit may be a big part of most consumers' lives, but that doesn't mean everyone fully understands the industry."For many people, credit is a weird thing," says Todd Albery,CEO of credit education site Quizzle.com. He believesmany consumers are intimidated by the notion thatthere is a "secret system used to generate a score that follows you all over the place."In an attempt to help you becomemorecredit savvy, we spoketo experts to clearup some common misconceptionsabout credit cards and credit scores.

Continued on page 12.



All credit scores are the sameMost consumers are probably familiar with

the FICO scoring model, which calculates your score on ascale of 300 to 850, but the truth is there are many othercredit score models available to consumers and the lenderswho service them. Pulling one or another isn't going toguarantee that you're going to see the same score that thelender does.

"Many of the scores calculated for and used by lenders are not available to consumers," says Susan Papp, a spokes-woman for credit card comparison site Credit Donkey."Consumers unaware of the variety of scores may purchasea score believing it is their 'true' score and when in realitythe score that lenders are seeing is quite different."

This is why it is important to pay more attention to theinformation on your credit report (as opposed to its accompanying score) and the risk level that the serviceyou are using to view the information assigns you.

Paying off debt will instantly change your score

Getting up to date on delinquent accounts is certainly agood idea, but a score of 580 isn't going to turn into a 700overnight no matter what you do.

"Negative information on your credit report that is accurate can only be removed over time," Papp says. "For example, credit delinquencies will stay on your creditreport for seven years and bankruptcy information will stayon your credit report for 10 years."

Your income affects your score

People tend to assume that the more money they make,the higher their credit score will be,but that's not the case.While it's true your income may affect your ability to payyour bills on time, it has no bearing on your credit score,Albary says.

Your income can, however, influence a lender's decisionto approve you for a loan. This is because lenders often compare the income you've listed on your application to thedebts listed on your credit report in an attempt to judgeyour ability to make monthly payments.

Using only cash will help your score

Sorry to break it to you, but consumers have to use creditto build credit. Credit scores are a way for lenders to predictwhether you will pay back money you've borrowed, and oneof the best ways to demonstrate your credit worthy-ness isto show you've paid off some type of debt before. Stickingto cash only may seem like the responsible thing to do, butit won't help you establish a payment history with lenders.This can be problematic when you need to buy a big-ticketitem such as a car or house.

"If you don't have or use credit, you may have no credithistory at all, and if you do, your credit score won't be asgood as someone who consistently demonstrates responsi-ble use of credit over time,"Albary says.

A store card will boost your score

If you're looking to build credit, you're better off addinga card backed by a major credit card issuer than a store cardbeing advertised at the point of purchase. While creditbureaus don't award extra points for taking out a line ofcredit from a big bank, store cards typically have lower limitsthan traditional credit cards, Nazari says. This can lead to ahigher utilization ratio if it's among one of the only cardsyou have in your arsenal.

Carrying a balance helps build credit

The credit bureaus are privy to your payment history andthe balance on your monthly credit card bill, "but they don'tknow if you're paying interest or not," Nazari says. Thismeans deciding to pay the minimum each month isn'tgoing to do much more than cost you money,especially ifyou're carrying a particularly high annual percentage rate.The lesson? Don't forgo payments just to carry a balance month to month.

MYTH3

MYTH4

MYTH5

MYTH6

MYTH7

MYTH8


Your 401(k) match got axed— now what?

hat should anemployee do if a401(k) match iseliminated? Is it stillworth making a tax-

deferred contribution into the401(k)? Is it worth avoiding thetaxes?

For starters, a matching contribu-tion to a 401(k) is a wonderfulthing. If, for example, your employ-er is willing to match half yourcontribution up to 3 percent, andyour gross salary is $50,000 a year,and you contribute 6 percent ofyour salary in a year, you con-tribute $3,000 to the 401(k) and the

employer contributes $1,500. That'sa fat 50 percent immediate returnon your investment for that year.

Not bad. But if the match is takenaway, how much in taxes does theemployee avoid if he or she contin-ues to contribute 6 percent to the401(k)?

Even if we leave state incometaxes aside, it's still worth makingthe contribution if you can swingit.

Sticking with your scenario of anemployee making $50,000 a year, ifthe employee is single, and leavingaside any tax deductions or taxcredits, their first $8,500 in salary istaxed at a rate of 10 percent, theirearnings from $8,500 to $34,500are taxed at a rate of 15 percent,and their earnings from $34,500 to$50,000 are taxed at a rate of 25percent, based on IRS tax tables.

So the federal income taxeswould come to $8,625. While theemployee is in the 25 percent taxbracket, the federal income tax bur-den is really 17 percent, which isstill a significant burden.

So on the surface, it is still worthmaking the 401(k) contribution,and when you factor in stateincome tax rates, the advantage isclear.

Of course, you might wish totemporarily reduce your 401(k)contribution in order to meet someother financial goal, such as payingdown consumer debt. If you arecarrying a credit card balance, youcould easily be looking at a rate of25 percent or more, and — depend-ing on your spending needs andhabits — be facing a multi-yearstranglehold.

W

Reasons to keepinvesting, and whento stop

By Philip Van Doorn, The Street






Steady as they gain 10 top dividend stocksto own until retirement

f the past is indeed pro-logue, now is the time to getconservative and consider

these less-than-barn-burning stocks,which have outperformed lots ofhigh-fliers.

This is an especially importantconsideration if you're looking at

your retirement years, and you can'tstomach another decade of volatileand negligible returns as we've seenover the past decade.

For the most part, they're boringcompanies. But so what? The hardchargers at the mutual fund compa-nies turned in a total return, includ-

I


ing dividends, of a loss of 0.5 percent in 2011, according toMorningstar. These stocks did better.

In most cases, they posted a share-price return in the high single-dig-its, and that, coupled with big divi-dends, will serve as a sea-anchor toyour portfolio, especially if you'reolder than 50 and looking at yourretirement years with trepidation.

In the 20-20 hindsight we allcrave, the odds are you could havedone better with a portfolio madeup of high-paying dividends stocks,and a modicum of these shares witha share-price gain. So you could saya hail Mary for your portfolio, orbetter yet, bet on old reliables likethese.

Yes, they can be boring or evenlugubrious as corporations, butthese companies churn out steadycash flow year after year and have-held their value like no other stocks.That's because they're into some-thing we can't live without, such astelecommunications and gasoline.

For example, AT&T (T), created

out of the "Ma Bell" bust-up,returned over $10 billion to share-holders in the past decade — it'snow at a current yield of 5.9 percent— and on top of that had a 10-yearaverage annual return of 1.7 per-cent.

But there's a wrinkle in the num-bers, as cigarette maker Altria Group(MO), perhaps one of the leaders inthe "sin" stocks category, is barelyoff the top-10 queue at a payer of$3.7 billion in dividends during thepast decade. It now has one of thehighest current yields, at 5.6 per-cent, and couple that with its 10-year, 10.5 percent share-price appre-ciation, you have a pretty heavenlyinvestment.

The 10 highest dividend-payers ofthe past decade are show to the left,per Standard & Poor's senior analystHoward Silverblatt, and ranked interms of total payouts. Keep inmind that the yield will changeconstantly with the underlyingshare price.


Visions, February 25, 2012

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