Strong Companies That Can Make the Payout

• ByTim Melvin, RealMoney.com Contributor
• On 11:29 am EST, Tuesday December 16, 2008

One of the strategies I have seen emerging amidst the recent market declines is concentrating on dividend-paying stocks. The theory is that collecting dividends smoothes volatility and allows investors to get paid while they wait for the market to recover.

I tend to agree, as a dividend is an assured return -- something very hard to come by in today's financial world. Treasuries pay no yield worth mentioning, corporate binds are far too risky and there are still a lot of questions about the safety of many municipal issues. While dividends can be cut or eliminated, as we have seen countless times in the last few months, a financially healthy company with a good dividend yield makes sense in the current environment.

It makes even more sense to me to add Tim's favorite criteria -- no debt on the balance sheet -- and find those financially strong companies that can continue to make shareholder payouts. Adding criteria for profitability so that large losses would not lead to dividend cuts, I came up with some interesting names.

A name that leaped off the list is a company I wrote about earlier this year. Ituran Location & Control is an Israeli company in the stolen vehicle recovery and fleet management business. Its products help locate, recover and return stolen vehicles, while its fleet management software allows companies to track their vehicles at all times and better manage fleet usage and expenses.

Although weak economies in Europe and the U.S. may slow growth, the company is well positioned in the Brazilian market, a key growth driver in the next few years as the nation recently passed legislation requiring location devices in all models manufactured in 2009 and onward. Ituran is already a market leader in Brazil and should benefit from the new laws.

The company recently reported a strong quarter, with revenues up 28% and operating profits up 60%. Netting out currency gains, operating profits were still up better than 35%, and the subscriber base grew 16% year over year. The company is in a solid position with $57 million in net cash, and has been returning cash to shareholders in the form of dividends and stock buybacks. With an EV/EBITDA ratio of just 3 and a P/E of 9, this stock appears cheap.

One of the more interesting names on the list of debt-free dividend payers is in the worst possible industry right now. Gentex supplies automatically dimming rear-view mirrors to the automobile industry. With all the talk of bailouts, cutbacks and collapses in that industry, many auto parts suppliers could be facing bankruptcy next year.

However, if you owe no money, you cannot go bankrupt -- Gentex has plenty of cash on the books and will be a survivor in the distressed industries. In addition, the company has been cutting exposure to the North American market while building market share in Asia and Europe. Gentex will feel the pain of the auto recession, but not to the degree of leveraged auto suppliers. Toyota and BMW are two of its top customers and 70% of key mirror sales are outside the U.S. Gentex also is introducing new products such as rear-view cameras and SmartBeam high-beams to diversify and build product lines.

This is one of those stocks you buy in market downturns and hold until the recovery happens. As a bonus, you get paid 5% to wait.

The soft insurance market and weak economy in California, its major marketplace, have hurt results at Mercury General Insurance , but the stock has held up well, due in part to its 5.5% dividend yield and rock-solid balance sheet. The company is one of the relative few that have raised its dividend payout this year, increasing 11.5% starting with the September payout. Traditionally, the company is a strong underwriter focusing on good business instead of higher-premium substandard business. As a result, Mercury has had a combined ratio under 100 for the past 10 years and also has raised dividends every year for the past 15. This is a conservative, well-run company that should be in most blue-chip and dividend-oriented portfolios.

Mercury is one of several insurance stocks I like to make the debt-free dividend list, which includes Erie Indemnity and American National Insurance . Galveston, Tex.-based American National has had catastrophic losses from hurricanes this year, with both Ike and Gustav hitting its key markets, but the company has a long history of profitability and has been one of my favorite stocks for years. At half of tangible book and a generous 4.4% dividend, it will be back in my portfolio on the next market downdraft.

As usual, I am going to run out of room but one last company you might look into for playing a tech rebound next year is integrated circuit-maker Analog Devices , which is debt-free and also recently increased its dividend. The stock currently yields 4.2% while the company is buying back stock. Analog Devices has over $1 billion in cash on the books and will survive the weak economy.

Combining the immediate payout of dividends with the safety of debt-free balance sheets makes sense for long-term nesters in this market. As always, buy on down days and move slowly to average into positions.

Buzz up!