"We think that junk bonds -- bonds rated BB+ or lower by S&P or Ba1 or below by Moody's -- are worth considering as part of a diversified income portfolio." says Carla Pasternak.

In her High Yield Investing, she asks, "If you agree with us that one's person's junk may turn out to be your treasure, how do you invest?" She answers by offers a pair of junk bond fund ideas.

"SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK) has a $2.2 billion portfolio of 140 junk bonds. Its holds junk bonds in only three sectors: industrials (75.8%), utilities (12.16%) and financials (8.72%).

"It pays a monthly distribution comprised entirely of earnings. JNK is best held in a tax-advantaged account as distributions are taxed at your marginal income tax rate.

As I have been sharing with our readers over the years, I do not suggest anything I would not do myself. Today I am calling your attention to the Williams Companies, Inc. (NYSE: WMB) which I bought today at $13.00.

I had already taken advantage of a negative market view on the stock by selling "naked puts" at a November $12.50 strike price receiving $2.25 per share. I have been touting this as a way to make some money if you truly are interested in owning the stock already. On the puts my break even position is $10.25, the same as the recent market bottom.

Most market watchers will not be surprised to learn that General Electric Company (NYSE: GE) will be slashing its dividend by 68% from 31 cents per share to 10 cents. GE decided to increase it's flexibility in these difficult times and although there have been indications that it could lose it's AAA financial rating, this could prevent or at least might forestall that possibility.

General Electric was included in my picks for the year and has not been holding up well because of its financial division, its largest entity, and the doubt cast by anything with leverage.

"The government will likely do whatever it takes to breathe life back into the banking sector," says Bryan Perry. In The 25% Cash Machine the growth & income specialist eyes iShares S&P US Preferred Stock (NYSE: PFF).

"One of the hottest themes of 2009 for big-cap money managers is to take a stake in high-yielding preferred stocks in companies backed by the Troubled Asset Relief Program.

"Preferred stocks were smoked with the credit markets in the latter part of 2008, to a point where the definition of 'capitulation' was rewritten for all time. But investors are still attracted to preferreds because yields are near double digits, and famed investors like Warren Buffett are also investing their money there.

This post is part of a special annual report -- Top Stock Picks '09 -- in which TheStockAdvisors.com asked 75 leading newsletter advisors to select their favorite investment for the new year.

As the name implies, Dividend Superstars focuses on quality income-generating ideas. Here, Nilus Mattive looks to Patterson-UTI (NASDAQ: PTEN) as his top "contrarian" idea for 2009.

"For the Dividend Superstars Annual Forecast Issue, I screened for companies that had zero debt, single-digit P/Es, recent dividend hikes, payout ratios under 25%, a dividend coverage ratio exceeding 2.

"While it was a tall order, one company jumped to the top of my list: Patterson-UTI. As one of the biggest land-based drillers in North America, the company is highly correlated to demand and prices for that commodity.

"Recently, that hasn't been a good thing, especially because the slowing economy and tight credit has made companies less inclined to drill. The shares have gotten, well, drilled!

"But everything is cyclical. And Patterson-UTI has the financial wherewithal to weather the storm. It also has plenty of money to dole out to shareholders.

This post is part of a special annual report -- Top Stock Picks '09 -- in which TheStockAdvisors.com asked 75 leading newsletter advisors to select their favorite investment for the new year.

"For the best risk-adjusted results we're looking at corporate bonds," says BizRadio host Daniel Frishberg, whose favorite pick for 2009 is the Energy Conversion Devices 3% convertible bond due 6/15/2013.

In The MoneyMan Report, he suggests. "These securities -- which are convertible into shares of the solar power stock Energy Conversion Devices (NASDAQ: ENER) -- could generate a major score, since the company is right in the Obama sweet spot."

"We are following the government as it moves its market manipulation up the risk curve.

"We have seen the government first buying commercial paper and short term bonds to move the Fed Funds Rate, then moving investors up the ladder to long-term Treasuries, then on to agency and high-grade corporate bonds.

"Each time, these moves have produced stock-like capital gains for investors with the knowledge to participate in these markets.

To look at it optimistically, it's a period of risk aversion.

Economists, business executives, analysts, and certainly employees are hoping it doesn't become an 'era of risk aversion' - - a longer period where businesses shun expansions and new projects, and investors avoid stocks.

Further, the risk-aversion theme is prompting investors large and small to flock to the 10-year U.S. Treasuries bond, also called 10-year notes, the yield for which was 3.05% on Friday at mid-day. (Bond prices move in the opposite direction of yield. Hence, when demand is strong, such as now, a rise in bond prices pushes their yield lower.)

Moreover the 10-year yield is likely to fall further in the next two quarters, as more investors flock to safe investments amid the U.S. recession, so says economist Richard Felson.

"We're seeing the value of safety come to the forefront. In this climate, investors don't care about yield, their primary concern is capital preservation," Felson said. "And despite the increase in debt the United States is likely to record over the next two years, the lowest risk investment remains U.S. Treasury notes. It's quickly becoming a sort of electronic mattress, the way savers used to store money in mattresses decades ago. Investors are saying, 'Here, take my money and store it until conditions improve.' "

The market is bouncing around with every bit of news leaked from the Congress as well as company warnings and Federal reports. 'My pal Warren' is frequently being asked his opinion about the stock market and his 'stock answer' is that he ignores the overall market and its daily gyrations and focuses on individual investments and price (value).

Buffett drew plenty of attention this week when he invested $3 billion dollars in General Electric (NYSE: GE) preferred shares set at a permanent 10% return with a buyout clause allowing GE to get them back at a 10% premium. In addition Berkshire Hathaway (NYSE: BRK.A) received warrants to buy an additional $3 billion worth of stock anytime in the next five years at a strike price of $22.50.

The company recently announced that it would curtail its stock buyback plan in favor of maintaining its dividend and its rare Triple-A financial rating. Given the vote of confidence expressed by Buffett (he got a great deal again) and the dividend yield of about 5% this stock is just screaming at me to buy more, but at what price.

Well, I have no crystal ball, but if you can buy GE at something less then the BRK.A warrant price and below its ten- year price you have to at least give it consideration.



Even though GE warned that earnings would fall below expectations for the quarter, (they report October 10, 2008, in one week), they are still earning more than they were the last time they were at this price. As a matter of fact, the metrics are far better now than they have been, according to this weeks Barron's recent follow-up story dated September 29, 2008.

They report that revenue has gone from $13 per share in 2000 to $19 now; cash-flow has increased from $2.00 to $3.30; earnings are up from $1.29 a share to $2.00 and the dividend has escalated to $1.25 from $0.57, yet the stock is 50% off recent highs.

As I have stated many times in other stories, if you are looking for an alternative to bonds or low paying treasuries that will give you a very healthy yield and the potential of sizable appreciation GE is a place to look. And now you can call Warren Buffett partner...sort of.

UPDATE: GE closed today at $21.57. Disclosure: We bought in at $22.00.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of BRK.B & GE.

TheStreet.com's Jim Cramer says this is a crucial moment for the dividend-payers, which should be getting support here.

You can't even find protection in yields these days. It just went away. Perhaps we will get it if Sen. Obama gets elected. Perhaps with higher rates. Perhaps with the downfall of the high-yielding American financials. (Nice discussion of the lack of dividend safety courtesy of the man who knows more about dividends than anyone, Dave Peltier, in the Columnist Conversation last week.)

For ages, it seemed you could get to a magic number, typically 4% yield, where stocks would bounce, or at least be given a parachute that opened for a gentle landing.

Last week that parachute failed. You have stocks like Con Ed (NYSE: ED) (Cramer's Take) just getting trashed here, pushing the yield to 6%. You have stocks like Weyerhauser (NYSE: WY) (Cramer's Take), Carnival Cruise (NYSE: CCL) (Cramer's Take), Gannett (NYSE: GCI) (Cramer's Take), just slicing through the protection. The former's got cyclicality, the middle's got consumer and fuel worries, and the latter is in secular. But they all have no trouble paying the dividend.

Or consider Verizon (NYSE: VZ) (Cramer's Take) and AT&T (NYSE: T) (Cramer's Take). The first is at a 5% yield, the other is almost there. No one questions their ability to support that dividend.

The stock market's recent run-up in the face of concerns about a recession could be driven by the Federal Reserve lowering of interest rates.

Usually, rate cuts are seen as boosting economic activity down the road, and hence cause stock markets to rally. But the reason behind this recent run-up may be different. The Wall Street Journal reports [subscription required] that "Despite recession fears, slowing profits and signs the credit crisis isn't over, the stock market is attracting a new wave of buyers: investors who are escaping pricey, low-yielding bonds."

It's true -- a 10-year treasury note that yields under 3.7% is a pretty good incentive to dive into the stock market. With concerns about a weakening dollar, investors will be lucky if that 3.7% is anything after inflation takes its bite.

But a run-up that's driven by investors fleeing from bonds and savings accounts might not be sustainable, and certainly doesn't reflect a lessening of concern about economic weakness.

Sometimes when the sky feels like it is falling, there's nowhere to hide. I don't actually believe things are crashing but the sentiment is decidedly negative and it's hard to get finance people to smile these days.

We read about investors who have made the decision to cycle out of equities and put more allocation towards fixed income. Given the fact that yield on the 10-year treasury is 3.89%, investors had been looking more towards junk rated bonds to get any form of yield.

Just this morning, Bloomberg has an article about default rates on junk bonds. Moody's Investors Services, the credit rating agency, now expects "the global default rate on high- yield, high-risk bonds, which finished 2007 at a 26-year low of 0.9 percent, will jump more than fivefold by the end of 2008."

The same Bloomberg article quoted Moody's analyst, Kenneth Emery as saying, "The high-yield default rate will increase to 4.8 percent this year and reach 5 percent by the end of 2009 because a weakening economy and ratings cuts will cause more issuers to miss their interest payments."

Bloomberg says that the percentage of issuers with debt trading at distressed levels rose to 11.5 percent, the highest since July 2003. To emphasize how things are worsening, just a year ago, the rate was 4.2 percent.

If it smells like junk, looks like junk and tastes like junk, well...

Zack Miller the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author holds a long term stock position in GOOG.

Many investors over the past couple of months, sensing volatility in the market, have been rebalancing their portfolios away from stocks and toward fixed income. Last week, we saw people stepping up and buying preferred stocks as well.

Interesting enough, finding a good list, database, or general resource for preferred stocks is not so easy. (Good idea for a start-up, anyone?)

So, when I came across investingfromtheright's blog post yesterday about a new-ish Exchange Traded Fund (ETF) from PowerShares called PowerShares Financial Preferred Portfolio (AMEX: PGF), it piqued my interest.

From the blog post, I learned the following:

An article in the latest issue of Barron's (log-in required) laments the decline of dividend-paying stocks. A quote form Morgan Stanley's Henry McVey is telling: "A lot of corporations are missing the seismic shift in retail demand for yield" and adds that Americans over 65 have equity portfolios with an average yield of 2.6%, versus 0.8% for those under 65.

I'm sure I'll get some angry feedback from the pro-dividend crowd on what I'm about to say here. I already got some flack for an earlier piece on the problems with dividends, and I frequently wonder why people care about yield. McVey's comment and statistic is telling. I believe that it is further evidence of the old-fashioned nature of dividends and their irrelevance in the current investment landscape.

The chief culprit behind the demise of the dividend is the advent of widespread share buybacks, and with good reason. Buybacks just make more sense, especially from a tax perspective. When you receive a dividend, you must pay taxes on it immediately. The increase in per-share value caused by a buyback is allowed to compound for as long as you own the shares. So buybacks start out ahead in that regard. It seems to me that the only reason you should prefer a dividend over a buyback is that you think that cash in your pocket (taxable) has a better future than additional shares of the company. If that's the case, it begs the question: Why do you own the stock?

When examining dividend-paying stocks, as with any investment, this is what you need to remember: If it sounds to good to be true, it probably is. The version of this adage that replies to dividend stocks is If the yield looks too good to last, it's probably unsustainable. The Sunday New York Times took a look at the dangers of high-yield stocks, and I though I would give my own three tips for avoiding big dividend nightmares like New Century Financial:

1. What is the payout ratio? If a company is paying out more than 100% of its income in the form of dividends, that means the yield is unsustainable. Occasionally companies with big depreciation expenses can get away with this, but generally yield-seekers should avoid sky-high payout ratios. If the company isn't making enough money to pay its dividend, that's bad.
2. Does the company have a lot of debt? A company that has a lot of debt would probably be better off paying down the debt than paying dividends, particularly if the interest rate on the debt is high. Which creates more value for shareholders: Paying down debt with a 10% or interest rate or returning money with tax.
3. Worst of all is when a company is issuing additional shares (via secondary offerings or private placements) while paying dividends. This practice looks a lot like a Ponzi scheme to me (paying returns to old investors with funds raised from new investors) and it's just bad corporate governance. Avoid these like the plague.

Most of all, remember this: There is no free lunch on Wall Street, or anywhere else. When a company pays a dividend, all it is doing is returning your money to you, with a corresponding decrease in the net worth of the shares you own.