Get paid to wait out the slowdown

By Harry Domash

Editor's note: To view the stock screen mentioned in this column, download the free MSN Money Investment Toolbox.

Most people agree that the economy is slowing. The questions now are how long the slowdown will last and how deep it will cut.

Given the uncertain outlook, I've devised a strategy for picking stocks with minimal risk in a weak economy that also pay you more in dividends than you'd earn by simply putting your money into a certificate of deposit. I call the results my "get paid to wait" portfolio.

I start with a screen for identifying large, profitable companies that the smart money is buying. For my list, I'm looking for stocks with a dividend yield of at least 4%, a significantly higher gain than the 3.5% your money might earn in a bank these days.

My screen doesn't know we could be heading into a recession, so I added a heavy dose of common sense to weed out the most vulnerable candidates.

Start with dividends

Because collecting dividends is the point, I start there by requiring a minimum 4% yield. Although it's tempting to look for higher returns, setting a higher limit would rule out some of the best candidates in terms of quality -- not a good idea in this dangerous market.

Screening parameter: Current Dividend Yield >= 4

• Dividend yield is the estimated dividend payouts over the next 12 months divided by the price you paid for the shares. For instance, the yield would be 5% if you paid $20 per share for a stock expected to pay $1 per share in dividends over the next year.

Yields yield appreciation clues

To pinpoint dividend payers with the best appreciation prospects, I borrowed a page from Geraldine Weiss' playbook. Weiss, the founder of the perennially top-rated Investment Quality Trends stock newsletter, developed a strategy that used dividend yields to determine when to buy or sell stocks that met her other requirements.

In essence, Weiss' timing strategy compares a stock's current dividend yield to historic values. It's a buy signal when a stock's yield is above historic average and a sell signal when below.

Consequently, I look for stocks that pay dividend yields equal to or greater than the average over the past five years.

Screening parameter: Current Dividend Yield >= Div. Yield: 5-Year Avg.

Big, profitable stocks

When it comes to safety, size matters. Large companies are typically better equipped to survive economic twists and turns than smaller companies. Most analysts use market capitalization -- share price multiplied by total shares outstanding, or how much you'd have to pay to buy all of a company's shares -- to describe size.

Stocks with market caps below $1 billion are small caps, those with market caps above $10 billion are large caps, and those in between are midcaps. For maximum safety, I limit the field to large caps.

Screening parameter: Market Capitalization >= 10,000,000,000

In my experience, whether you're looking for rockets, beaten-down value plays or dividend payers, you get the best results by sticking with profitable companies. Return on equity, which is net income divided by shareholders' equity (also known as book value), is the most widely used profitability gauge.

Normally, we'd want to see ROEs above 10% and, ideally, above 15%. However, given that the credit market freeze may have squashed recent profits, I require only that the average ROE over the past five years be in positive territory.

Screening parameter: ROE: 5-Year Avg. >= 1

Continued: Follow the smart money

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