Safety first

Seligman's Rodney Collins outlines an approach for a sound portfolio

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What’s the difference between the stock market and a pleasure cruise? After a long stretch of fantastic sailing, the cruise ship passengers aren’t wondering if it’ll soon be time to jump overboard.

They may be an easy target for jokes, but nervous investors are no laughing matter to portfolio managers. With shareholders at times a skittish bunch to please, Rodney Collins, co-portfolio manager of the Seligman Income Fund in New York (800-221-2783), says the answer lies in keeping a lid on risk. To keep lifeboats on board and passengers safe and happy, skipper Collins opts for the safe, if somewhat staid, position. He relies heavily on bonds and convertible bonds to make up 60% of the portfolio, as of this writing. Those two asset classes act as a ballast should the market get turbulent. But there’s a knack to picking stocks that also keep the portfolio earning steadily as she goes.

Start with a solid dividend, one that could qualify as attractive in the current market. A CPA by training, Collins is the kind of buttoned-down, straight-laced sort that prizes a healthy dividend not only for its flow of income but also because it helps cushion the ups and downs of a company’s stock price (see “Investment Tip-Offs From Management,” September 1998). His Income Fund portfolio, therefore, is stocked with companies that boast an average yield of 3% (annual dividend divided by stock price), no mean feat considering that the figure for the Standard & Poor’s 500 index is an anemic 1.35%.

After eyeballing dividend yields, Collins focuses next on relative valuation, or how cheap (or expensive) a stock is compared to its industry peers. Here, he might not have his sights set on any fixed discount, but he does gravitate toward companies selling below the industry average. He’s also curious about how business is going, looking for assurances that a company selling at a bargain compared to the rest of the industry still has what it takes to keep up with the group.

Finally, Collins likes to return to dividends for a final check, this time to see how a company’s yield stacks up against the rest of its industry.

Baxter International (NYSE: BAX), a biotechnology firm, is one stock that measures up to Collins’ demands. Known for products such as blood-clotting agents used to treat patients after surgery, Baxter is experiencing accelerating earnings growth. Better yet, says Collins, the company’s dividend of $1.16 makes for a yield of 2%, compared to an average of 1% for industry peers. Meanwhile, Baxter’s price-to-earnings multiple (P/E) of 20 is a full one-third less than its rivals’ average of 30.

Tobacco litigation or not, cigarette maker Philip Morris (NYSE: MO) makes Collins’ grade as well. The company boasts a dividend yield of 4.1%, yet sells at a P/E of 12. Philip Morris’ peers in consumer staples currently fetch a multiple of 18 times earnings. “You know, it doesn’t need to win litigation to get its stock to rise,” notes Collins. “All you need to see is a

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