Part 2 (1/2)

Table 4: Stocks Added for 2012

To give a bit of a ”big picture” view of our changes, Table 5 gives our annual sued by sector Note the shi+ft away from Consumer Staples (we probably had too many) and toward Health Care Part of the shi+ft to Health Care reflects the changes we envision particularly in the application of health-care technology; also, we feel that many health-care stocks have been relatively undervalued due to uncertainty arising froood bet that we'd trim health-care next year as events sort the best from the rest

Table 5: analysis of 2012 Best Stocks Change by Sector

Yield Signs

In mid-2010, Standard and Poors (S&P) index expert Howard Silverblatt calculated that 136 of its S&P 500 companies had raised dividends by mid-2010 and only two had reduced or suspended dividends That compares with 157 increases for all of 2009, feathered in with seventy-eight decreases or suspensions, fifty-seven of which came from the financial sector alone Experts expect 2011 to be a banner year for dividends, although Silverblatt himself postulates that dividends won't recover to 2008 levels until 2013

The fact that this is so at first glance sounds like a negative, but the chief reason appears to be restrictions placed by the Fed on dividends by financial institutions (which are slowly going away) Aside froree that dividend increases will be in the double-digit range, as companies hold some 16 percent of their reater returns, and as co Indeed, as reported earlier, ninety-five of our 100 Best cohty-six dividend-paying stocks on both the 2011 and 2012 lists increased their dividends during that period

Indeed, Hewlett-Packard raised their dividend 50 percent and proclaien paid dividends for the first time, and Iron Mountain raised its dividends fro substantial, from 25 cents to 76 cents per year in one fell swoop Not only did these coeneral, as we exa over and overregular dividend increases throughout the past ten years and longer It's like getting a raise every year; we like that a lot If you buy a stock today paying, say, our average yield of 22 percent, and es to eke out a 10 percent increase every year for ten yearswe'll do the math for youthat yield would expand to 57 percent if the stock price stayed exactly the same Which it probably wouldn't; we'd expect the stock price to groell, reflecting the coet both benefitsa 57 percent annual return on your original investh increases in share prices Does that sound too good to be true? Hardly, in fact, the h history, would have produced just this saons around these stocks and others like theenerate the sa forward We think every investor should enjoy not only a decent current return, but also nice raisesforward

This scenario, in fact, hasand retire scenarios While we do expect markets overall, and our selected stocks in particular, to appreciate over tiood businesses capture eneral, stock price growth has beco record of 1011 percent annual groe think, will become more difficult to match As a result, we think the more solid play is to invest for dividends, and particularly for dividend growthand hey, if the stock price happens to grow too, so much the better

Appendix B shows dividend yields for all 100 Best Stocks for 2012 For this year, we added a colu the dividend paid last year, so you could see the year-to-year change Appendix C shows all 100 Best cohest yielders at the top of the list Interestingly, thirty-one of our 100 Best picks pay a yield of 3 percent or higher

Last year, we started to define ”star” categoriesgroups of stocks, essentially the ”best of the best” in five categories, we chose to highlightYield Stars, Safety and Stability Stars, Growth Stars, Recovery Stars, and ”Moat” Stars This year we keep the saories, and kick it off as we did last year with Yield Stars

Table 6 belos the top twenty stocks on our 100 Best list by percentage yield as of mid-2011

Table 6: Yield Stars

REMEMBER, THERE ARE NO GUARANTEES

While dividends and especially high yields are attractive, investors must real obligation to pay them! Interest payments on time deposits and bonds are much more clearly defined, and failure to pay can represent default But with dividends, there is no such safety net Companies can and do reduce or elily observed with BP in the wake of the Deepwater Horizon Gulf spill disaster Dividend investors should therefore keep an eye out for changes in a cos in a single high-yielding basket On the flip sideas investors becoement teams become more conscious of such investor consciousnesswe've seen a lot of companies trumpet their recent dividend increases rather loudly to their investors and the investing public It's a nice sound that we hope to continue to hear

Dancing with the Stars

Readers have frequently asked us: ”Out of your 100 Stocks, what are the best ones? What are your top ten picks?” Well, we don't actually rank our 100 Best Stocks as one through 100 Why? Because different stocks serve different interests, needs, and risk tolerances, as, in a stock portfolio And we're sure that if we name a ”number one,” everyone will follow our lead into it and so will happen like the Gulf oil spill or soe in business conditions The art and science of stock picking si an overall nuroups of stocks to build a portfolio much as a diner in an a la carte restaurant picks several dishes to le best dish on the menu

With that in mind, we do believe we can create so the top ten stocks by certain attributes typically of common interest to investors, especially value-oriented investors So this year we once again offer top ten lists in four categories We call the the idea forward froories are Safety Stars, Growth Stars, Recovery Stars, and Moat Stars

Safety Stars

Safety stars are coative stock markets as well as recessionary econo traditions of being able to ht” stocks when the going gets tough This list is unchanged froh it wouldn't have been hard to pick a fewor Procter & Gamble, from the remainder of the 100 Best list

Table 7: Safety Stars

Growth Stars

Looking at the other side of the coin, we picked ten stocks we feel are especially well positioned to grow, even in a negative economy and especially in a positive one This year, because we ressive Stocks You Can Buy list and book, we identified three new candidates: Apache, St Jude Medical, and Teva Pharmaceuticals

Table 8: Growth Stars

Recovery Stars

As we continue to e a normal course of economic recovery) we feel that certain companies will do especially well The assessment is based both on top line revenues and their ability to cut costs during bad tiood times return, these companies will be particularly well positioned to turn recovery into bottoly, you'll note that several stocks on this listAlexander & Baldwin, Caterpillar, and Deerealso made our ”Winners” list for best performers in the 20102011 performance assessment (see Table 1)

This year ill stay on the saave us a nice ride last year: Table 9: Recovery Stars

Moat Stars

Finally, we get back to one of the basic tenets of value investing; the ability of a company to build a sustainable and unassailable co aficionados call such an advantage a ”moat,” for it represents a barrier to entry for coe for soy, the use of technology, a brand, enduring customer relationshi+ps, channel relationshi+ps, size or scale, or si it hard or even impossible for competitors to catch up The appraisal of a ”ive our top ten picks based on the size and strength (width?) of thefro production problee has one of the widest moats we can think of We also dropped Patterson Dental from this list upon realization that there is inally perceived, all chasing what's become a more competitive dental market We added Starbucks (yes, there's Peet's, Caribou Coffee, and dozens of other coffee players, but oh, what a brand) and Visa (ould leave home without one?) to the Moat Stars list