Great Investments for Lousy Times

Have you seen the news lately? When I sat down to write this, I was paralyzed -- I couldn't figure out where to start. It's a mess out there.

The U.S. auto industry is on the edge of collapse, thanks partly to past mistakes, and partly to the weight of an (ill-informed, in my opinion, but I digress) public outcry.

A respected investment firm turns out to have been a $50 billion Ponzi scheme. The money is gone. The eminent founder, Bernard Madoff, is said to have been completely open and forthcoming about the whole thing as the FBI took him into custody. But it makes one wonder: Are there more of these out there?

Home prices are still falling, foreclosure rates are still scary, and it increasingly appears that efforts to stop foreclosures aren't likely to do much more than delay the worst of it for a few more months. You think the last few months have been bad? 2009 could be hideous.

At least the gas is cheap, for the moment. But seriously, what do we do?

Hunkering down
If your instinct is to hunker down and stay under cover until the storm passes, you're not alone. One interesting statistic in the sea of financial despair today comes from the Fed's quarterly flow of funds report, which indicated that outstanding household debt shrank during the third quarter. That's unprecedented since the Fed started doing this report in 1952.

In one sense, that's good news -- people are paying down debt! On the other hand, consumer debt drove a lot of the economic good times. This isn't exactly a bullish signal, good as it may seem from a financial-prudence perspective.

Reducing or eliminating non-essential purchases, paying down debt, and saving are all natural reactions to worsening economic times. In general, people will continue to buy food and basic consumer goods like toilet paper, cigarettes and booze, and essential medicines, and they might spend occasionally for something like a new cell phone, but they'll tend to put off major appliance and car purchases as long as they can. And when they do shop or eat out, they'll stick with discount options instead of living large.

If you look carefully, there's an investment strategy in there.

The hunkered-down portfolio
Here's what I'm thinking this morning: Amid the marketwide sell-off, there are intriguing opportunities among exactly those sorts of businesses. When the market may not be able to muster any sort of sustainable rise for an extended period, stocks that pay dividends start to look very attractive.

Companies with low debt, stable markets, and dividends that have a good chance of being sustained through the recession are especially attractive. Here are a few for your watch list:

Source: Yahoo! Finance. Data as of market close on Dec. 12, 2008.

Cigarettes, drugs, drinks hard and soft, and an oversold cell phone maker for good measure ... sounds like a heck of a party, doesn't it? In all seriousness, when I screen for stocks with strong dividends and low debt these days, over and over I find commodity and energy companies, pharmaceutical firms, and basic-stuff businesses like PepsiCo and Unilever.

Since I don't have any idea where commodity prices are likely to go in the next year (for every bullish argument, I can find you a bearish one, and vice versa), I'm increasingly inclined to put the more conservative part of my stock portfolio into names like these.

It's a defensive way of thinking, but it's less defensive than cash -- I'm likely to get some growth (by reinvesting those yields) no matter where the market goes in the near term, and when the next bull run starts these companies will stand to benefit along with the broader market. And given that most of these stocks are (relatively) unlikely to have significant further downside absent a huge economic deterioration, buying soon seems like a good way to go.

To read more about dividend-stock investing:

• A Better Place for Big Income
• Build Wealth No Matter What
• Now's the Time to Double Down on Dividends