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August 31, 2009

Going where the dividends will be

Today, investors looking for dividends are finding slim pickings. Many stocks that investors used to count on for income have either slashed their dividends or eliminated them completely.

Wayne Gretzky once said that, "a good hockey player plays where the puck is, and a great hockey player plays where the puck is going to be." I think this applies equally well to great investors like Eugene Groysman , one of Marketocracy's mFOLIO Masters. Instead of buying stocks that are paying meager dividends, Groysman is buying stocks that he thinks could be increasing dividends in the future.

Which stocks might those be?

Groysman thinks the banking sector is a good place to look. After taking tremendous losses last year, many banks cut their dividends to rebuild their capital and repay the money they took from the government through TARP. However, now that banks are paying close to zero interest for short-term deposits their profit margins on their loan portfolios have increased to the point where the strongest banks have been able to repay their TARP funds in less than 1 year!

The question is, what are they going to do with these profits next year? Since many banks paid dividends consistently for a very long time (until last year), Groysman anticipates that healthy banks will start to restore their dividends.

In a previous article, Groysman told us why he likes US Bancorp (USB). Today, I'm going to let him explain his thinking about Barclay's PLC ADR (BCS).

BARCLAYS PLC ADR (BCS)

By Eugene Groysman

With the current market recovery and increasing numbers of baby boomers retiring, they have been asking themselves, what now? Through numerous discussions I have been having with prospective retirees, the main concern I keep running into is, since this market downturn, when do I move from growth oriented to income oriented, and what type of investment would be better suited for that? My answers keep coming back to dividend paying stocks. All my current ideas surround investments that pay you back. Another solid dividend driven investment is this group is Barclays PLC (BCS).

The stock like every other financial stock was hit hard by the market meltdown, but in the past 5 months it has made significant moves to the upside. The 52 week trading range is between $2.75 and $32.50 that is about 1181% and a two year trading range of from $2.75 to $50.95, or about 1850%. Currently the stock is trading at $23.41, which is off its 52 week high, and way off its peak high from 2007 before the market meltdown. Even if the stock only hit $37.81, which would break out of its 52 week trading range, there still would be about a 70% return. Additionally, Barclays has not lowered its dividend in the midst of this financial crisis, which is a sign of strong capital reserves. It currently pays $1.79 per share or about 7.6%. If one were to only look at the dividend alone, the stock is a worthwhile position, but if you factor in the cheap nature of the stock it is doubly attractive. Most high paying dividend stocks have slashed dividends in this trying time, but Barclays has opted to keep it high.

On August 3, 2009 Barclays earnings rose 10% for the first half of 2009 as stronger earnings from its investment banking division outweighed an increase in bad loans. Barclays Capital investment banking division pretax profit rose 100%, boosted by the acquisition of the bankrupt Lehman Brothers investment bank. Barclays has also expanded its operations in India, Africa, Pakistan and Indonesia. The Bank will also raise about 8.2 billion pounds (10.7 billion US) by selling its Barclays Global Investment unit to American Blackrock Inc, a fund management company, but will retain a 20% ownership stake.

This company has made great leaps in the past 6 months rising nearly 700%, but the stock is still under its one and two year highs. It has a large dividend, and has made great strides to increase profitability. If you can buy into a depressed stock with a high dividend it would be a win/win situation. Not only would you capitalize on a cheap stock, but also your percentage yield would be higher. This stock is a good play for the retired or soon to be retired, especially if you are looking to convert to a more dividend driven portfolio.

Eugene Groysman is a Marketocracy mFOLIO Master -- the cream of the crop at Marketocracy.com. We've tracked Groysman since 5/9/2003. Over the past 6 years he averaged 25.8% a year. During the same period, the S&P 500 returned 3.6% a year. That's why we started making his portfolio available for registered investment advisors and their clients in a managed account program.

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