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Lessons Learned From Netflix’s Shattered Wall Street Romance

October 27, 2011 – by Richard Band

Money in Heart-Shaped BoxJust three months ago, online movie distributor Netflix (NASDAQ:NFLX) was one of the hottest stocks you could own, having soared 800% since the March 2009 market low. But then, in a matter of weeks, the company’s business model came unglued. After Tuesday’s plunge, anyone unlucky enough to have bought NFLX at the July top is now sitting on a 73% loss.

My point? Investors are becoming increasingly skeptical of outfits that promise fantastic earnings growth but don’t return any cash to shareholders in the form of dividends (or even stock buybacks).

Before the next mega-bull market is ready to lift off, I predict the, “Look, Ma, no dividends!”, philosophy will have been completely discredited. We’re getting there, one Netflix disaster at a time.

Meanwhile, dividend-rich stalwart McDonald’s (NYSE:MCD) hit an all-time high this week.

MCD is the answer to a question that bothers many investors: “If you’re worried about a bear market for stocks in 2012, why don’t you sell everything?”

The fact is, some great defensive stocks can hold their own even when the rest of the market is crumbling. With its generous 3% dividend, McDonald’s is the perfect candidate to slay any 2012 bear.

Higher on my shopping list is another fine dividend payer, Novartis (NYSE:NVS). The Swiss drug maker reported decent Q3 profits Tuesday, with earnings per share up 10% from the same period a year ago. However, the company also announced plans to cut 2,000 jobs — a disclosure that adds urgency to management’s concerns about downward pressure on drug prices.

Within a few days, I think the market will absorb the news about the job cuts and realize that NVS is, in fact, doing the right thing for the long-term health of the business. At a mere 10X this year’s estimated earnings, the stock is priced very cheaply for one of the world’s premier pharmaceutical enterprises. As recently as 2007, NVS sold for over 20X earnings. Dividends, increased 14 years in a row, are normally paid once a year, in April. Current yield: 4.4%.

For a somewhat more aggressive dividend play, you might want to consider First Niagara Financial Group (NASDAQ:FNFG). The Buffalo-based banking chain posted solid earnings last Thursday, up 8.7% on an operating basis from a year ago.

FNFG also reported superb credit quality, with nonperforming assets amounting to a microscopic 0.29% of total assets. Given these numbers, there’s no good reason why the stock should be as low as it is.

Yes, this is a bank and we all hate banks. But doesn’t a well-covered 7.5% dividend yield count for something? I’d like to think so.