Editor's note: This was originally published in two parts on RealMoney. It is being republished as one article as a bonus for TheStreet.com readers.In case you really thought the early part of 2009 was going to be any different from 2008, the headlines should help relieve you of that notion. The talk remains of weak economic conditions, geopolitical unrest and the condition of Steve Jobs' health. The list of Madoff victims continues to grow. The incoming president is on Capitol Hill, pushing his combination of government spending and tax cuts to reignite the moribund economy. It seems to me that a combination of reduced income and increased spending is how we got in this mess in the first place, but what do I know? What bothers me the most is that all the bullish prognosticators I hear and read are basing their cases on unknowns. We do not know what form the stimulus will take or how long it will take to stem the tide of job losses. Will having the Fed buy mortgage-backed securities really help stop the decline in housing? Again, we have no idea. What concerns me is what we do know. The economy remains weak, housing is still declining, and corporate earnings are horrible. What if I am wrong? I believe the market has at least one big bump down before we can even begin to think about a bottom, but what if I am wrong? My bread and butter is stock-picking for the long term based on individual company fundamentals. Occasionally I put on a macro trade like my current long iShares 20+ Year Treasury ETF ( TLT) LEAP puts and long U.S. Oil Fund ( USO) LEAP calls, but I never claimed to be the world's greatest stock market directional trader. In truth, I pay a lot more attention to the market calls of Rev Shark and Doug Kass than to my own on a short-term basis. So, what if I am wrong? Ask my kids -- it happens sometimes.
One way to be in the market and maintain a margin of safety in case I am right would be to own a portfolio of stocks that have no debt and pay a high, sustainable dividend. These stocks will participate in a rally, and the dividend should offer some downside protection. In theory, the high-yield stocks should be at least slightly less volatile than the overall market. On Monday, I ran a screen to see what companies I could find that offered debt-free balance sheets and high dividend yields that appeared sustainable. I came up with some interesting companies. Barnes & Noble ( BKS) has had a difficult year, to put it mildly. Revenue and margins at the nation's largest bookseller are under intense pressure. The combination of a poor consumer environment and competition from Amazon ( AMZN) has combined to pressure results. The stock price has reflected this, with shares dropping over 50% in the last 52 weeks. At today's price, the share yield is over 6%. Barnes & Noble has no debt, and the dividend is a little less than 60% of net profits. Barring a depression, I believe the company can continue to make the payout until the economy recovers and someone besides me is buying books at retail stores again. It is likely that its largest competitor, Borders Group ( BGP), either goes into bankruptcy or has or sell itself to Barnes & Noble at fire-sale prices in 2009. This would place Barnes & Noble in a dominant position. Biovail ( BVF) would be a somewhat more controversial selection from the list. Management has committed to maintaining the very high (17%) dividend yield, but that could change in the future. Competition from generic manufacturers has hurt the sales of some of its leading drug offerings. The company has also had to reach settlements with both the FDA and the SEC in the past year.
The company recently closed plants in Puerto Rico and Ireland, reducing the employee head count by 300. Biovail is also selling non-core assets the projects that the savings will realize $100 million in cash to fund its new focus on drugs affecting the central nervous system. In spite of the debt-free balance sheet and high yield, this is one of the riskier names on the list, and I would only be a buyer of downdrafts in this stocks. Some old favorites of mine make the list as well. Mercury General ( MCY - Get Report) has suffered the same weak insurance environment and poor results from investments as its competitors. However, the high dividend, solid balance sheet and low volatility make the stock a good choice for dividend portfolios. The same can be said for Erie Indemnity ( ERIE - Get Report). Patterson UTI Energy ( PTEN - Get Report) also makes the list, yielding over 5% after being punished by falling energy process and hedge fund liquidation-related selling in the fourth quarter. I believe the market will go lower in the quarter. I could be wrong. One way to stay in the market and protect against the downside is to own companies that have solid balance sheets and high dividends. This was originally published on RealMoney on Jan. 6, 2009. For more information about subscribing to RealMoney, please click here.