Eaton Vance $ETN - A Warren Buffett holding, Eaton Corporation operates as a power management company primarily in the United States, Canada, Europe, Latin America, and the Asia Pacific. Eaton has a dividend yield of  4.5%, a trailing PE ratio of 9.5, a forward PE ratio of 14 and a Price/Cash Flow ratio of 4.7.

Entergy Corp. $ETR - Entergy Corporation, together with its subsidiaries, operates as an integrated energy company. Entergy has a dividend yield of 4.1%, a trailing PE ratio of 12.7, a forward PE ratio of 10.5 and a Price/Cash Flow ratio of 4.6.

AT&T $T -  AT&T Inc. operates as a communications holding company. Its subsidiaries and affiliates provide the AT&T brand services in the United States and internationally. AT&T has a dividend yield of 6.8%, a trailing PE ratio of 11.5, a forward PE ratio 11, and a Price/Cash Flow ratio of 4.

Pfizer Inc. $PFE -  Pfizer engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals worldwide. Bruce berkowitz of Fairholme Capital $FAIRX a manager that operates on the same value oriented principles as Warren Buffett has about 21% of his fund invested in $PFE. Pfizer has a dividend yield of 4.4%, a trailing PE ratio of 12.4, a forward PE ratio of 6.7, and a Price/Cash Flow ratio of 5.5.

*ETR current yield is 3.8%

*Price/Cash Flow ratio -  A measure of the market’s expectations of a firm’s future financial health. Because this measure deals with cash flow, the effects of depreciation and other non-cash factors are removed. Similar to the price-earnings ratio, this measures provides an indication of relative value.

Here are three companies that currently offer a nice dividend payout.  All three have market caps over 2 billion dollars and trade at a reasonable price/earnings multiple. All three do not have any debt on the balance sheet according to the ending quarter.

1. Garmin Ltd. (GRMN) Has  a  3.8 % yield with 938 million in cash and free cash flow of  534 million.

2. Paychex, Inc. (PAYX) Has a 4.7% yield  with 489 million in cash and free cash flow of 607 million.

3. Interactive Data Corp. (IDC) Has a 3.5% yield with 244 million in cash and free cash flow of 150 million.

*Free cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. While free cash flow doesn’t receive as much media coverage as earnings do, it is considered by some experts to be a better indicator of a company’s financial health.

Author currently has no positions in securities mentioned

With a sharp fall in interest rates in recent months, life for savers has become much tougher. Bank fixed deposits are offering as low as 3.5-5.5% returns for 6-12-month  period and liquid schemes of mutual funds just a little higher at 4-6%. In other words, holding cash or short-term deposits has started to pinch. 
The market situation encourages even risk-averse investors to step up their risk appetite marginally in order to take advantage of higher returns. One such opportunity where the market is offering an attractive risk premium for investments is that of “income funds” offered by mutual funds. 

Many investors who have significant investible surpluses appear not to be convinced of the opportunity to invest in income funds. Most investors who do not relate to volatility in debt markets are quite comfortable with the same in equities. 

Investors in income funds must be prepared to stay invested for a minimum period of six months, if not a year, and evaluate the returns on their investments for the holding period and not on a day-to-day basis. In fact, according to Crisil Composite Bond Fund index, those who invested in these funds earned handsome returns (please note that past performance is not indicative of future returns). 

The Crisil benchmark for the period ending April 29, 2009 went up by 20.1% p.a. in six months and 10.4% p.a. in 12 months (Source: mutualfundsindia.com). Investors need to appreciate that these returns were achieved not in a straight line, but despite a significant volatility in the benchmark 10-year government bond yields. 

Another important point to consider here is that like in any volatile asset class, the returns in income or bond funds vary considerably from fund to fund. It is here that the expertise of the fund managers is tested. This brings us to understanding an important difference between “actively v/s passively managed income funds”. 

Passively-managed income funds, by definition, mirror the benchmark index whereas actively-managed funds aim at outperforming the index. Those fund managers who have actively or dynamically managed their funds well have been able to outperform the benchmark considerably. 

The case for investing in income funds is stronger at this time since the 10-year government bond yields have not fallen in line with a sharp decline in short-term rates. The spread between yields on 91-day Treasury bills and 10-year GoI bonds has gone up from 60 basis points to 290 basis points and that on the 364-day Treasury bills has gone up from 40 basis points to 250 basis points over the one-year period ending April 29, 2009. 

This disconnect is due to the overhang of government borrowing programme for FY09-10, which is high considering the high fiscal deficit. The market is looking for more reassurance on factors such as how RBI is managing the borrowing process for the government — whether there are any policy decisions by the new government relating to disinvestments and so on that can reduce this high deficit. 

There is a good possibility that the current spreads between short-term yields and 10-year yields could contract as a result of a fall in the latter. However, over a medium-term, the policies of the new government will determine the bond yields. 

A key differentiator between gilt funds and income funds is that the latter maintain an appropriate blend of corporate credits and government securities. This blend provides the benefit of diversification, particularly when the credit spreads are contracting. 

Over the past one year, the credit spread between 10-year AAA-rated credit and 10-year GoI bond went up from 200 basis points to almost 400 in October 2008 and has come back to 200 at the end of April 2009 (Source: Bloomberg). The concerns on many AAA credits have abated and it is likely that this spread will come down further. It should be noted that the credit spread had gone to as low as 25-30 bps in mid-2005 when the credit appetite was at its best. 

Investors who invest in carefully-selected dynamically-managed income funds should aim at taking advantage of an attractive risk premium offered by such funds when compared to bank fixed deposits /liquid funds. Investors must take the help of investment advisors in selecting appropriate dynamic income funds and each investment decision must follow an assessment of the individual’s risk profile. 

By Nikhil Johri of The Economic Times

My timing was off a bit with this stock, which I can surely acknowledge. However this is one company I think everyone needs to add to their portfolio, especially at this price. The fundamentals, and technicals, are right in line.

I was far too early to call this one on January 23, but the points I outlined in that post have thus far proven to be a big driver of success for Philip Morris $PM. The supercharged emerging market play on a very popular product couldn’t be wrong. Neither can a 5% dividend yield.

I can see this stock going higher before the company releases its earnings on July 23. The weak dollar rally that the US stock markets have been thriving upon is going to really help Philip Morris, which only does business overseas. Its profits, when brought back to the US, are going to buy a lot more, and I can foresee an excellent quarter and even better forecasts from PMI.

I liked it at $35, I like it just as much at $43 and I’ll probably even like it at $50. The tailwinds behind this stock are simply too strong to ignore.

From a technical standpoint there are a few clouds in the sky, however. This stock does not handle an oversold RSI figure very well, and rarely trades out of the 30-70 range naturally set in any Wilder calculation. As such, a small consolidation here should be expected, though I’m looking for a bottoming formation on the $42 level before heading higher. The cup needs a handle, if you catch my drift.

Regardless of the technicals, this is one for the long haul. With the weak dollar coming back, this stock will only do better. And who can pass up a 5% yield? Not me, especially not with the opportunity for excellent capital gains.

By Jordan of the Investing Blog