Here we highlight our preferred stocks for long term investors seeking returns through income. We have selected solid companies able to ride out the tough times, offer very decent yield in the mean time and likely to provide capital return when conditions improve. Note that most have Narrow or Wide Moats and are Low to Medium Business Risk. Many of these stocks have been beaten down by a market particularly harsh on banks, financials and companies exposed to weakening housing and consumer spending.

Investors should take at least a five year view. The bear market and uncertain economic climate means that the share prices of these companies could very well fall further before they eventually turn around. The risk tolerance of individual investors should dictate their actions. Conservative investors should stay on the sidelines until there are signs the bear market is over. Bolder investors, not so concerned about near-term capital loss, should act now.

BANKS

ANZ Banking Group (ANZ)
Price: $18.09
Recommendation: Buy
Moat: Narrow
Business Risk: Low-Medium
Pricing Risk: Medium

Commonwealth Bank of Australia (CBA)
Price: $40.02
Recommendation: Buy
Moat: Narrow
Business Risk: Medium
Pricing Risk: Medium

National Australia Bank (NAB)
Price: $26.31
Recommendation: Buy
Moat: Narrow
Business Risk: Low
Pricing Risk: Medium

Westpac Banking Corporation (WBC)
Price: $19.43
Recommendation: Buy
Moat: Narrow
Business Risk: Low-Medium
Pricing Risk: Medium

Australian bank share prices have been slaughtered over the past six months. The word bank was globally synonymous with shorting and the hedge funds have played merry hell with share prices. The 30% jump in Wells Fargo share price following their June quarter result should emphasise the fact that all banks are not the same and that includes Australian banks. Our banks are well run, well capitalised and well provisioned regional banks with little direct exposure to the North American economy. Generally they will report increased profits and higher dividends in FY08 and FY09. This will not generally be the case for Northern Hemisphere banks.

We are not ignoring the effects of the US sub-prime credit crisis. In our Banking Special of May 29 - Issue 20 - we examined several critical items and ratios vital to a banks' health and earnings performance, namely Net Interest Income (NII); Net Interest Margin (NIM); Non-Interest Income (N-II); Cost-to-Income ratio; Credit Impairment; Collective Provision/Risk Weighted Assets; and Capital Adequacy.

Our conclusion was Australian banks are in good shape. Problems of many of their US and European counterparts have not emerged. There has been no need to re-capitalise. Australian banks were generally not directly exposed to US sub-prime problems but have been affected indirectly by the resultant sharp increase in wholesale funding costs and the liquidity squeeze in global debt markets. Credit growth is slowing and the credit cycle is in the early stages of rolling over with impairment charges rising sharply. Australian economic growth is slowing and banks are bankers to the economy. Therefore slower earnings growth is anticipated than that achieved over the past decade. Dividend growth is likely to slow as banks conserve capital.

By taking a three to five year view we suggest a portfolio of the four major banks will provide well above average total returns - the combination of capital gain and fully franked dividends - for investors at current prices.

Alesco (ALS)
Price: $7.06
Recommendation: Buy
Moat: Narrow
Business Risk: Medium
Pricing Risk: Low

With over half of earnings exposed to housing, the market has sold this stock down heavily on concerns about the deteriorating outlook. This appears an overreaction, leaving the stock underpriced and offering an attractive 10% fully franked yield. The diversity of earnings and contributions from acquisitions ensures earnings growth remains. Construction & Mining is benefiting from increased resources and infrastructure investment activity and Scientific & Medical is generating solid organic growth. The company is strongly positioned for a turnaround in property, when that occurs, through the kitchen & bathroom products and garage doors businesses. Costs are being reduced to support margins. This is a well managed business with strong cash generating ability supporting the dividend stream.

AMP (AMP)
Price: $6.30
Recommendation: Buy
Moat: Wide
Business Risk: Medium
Pricing Risk: Medium

It's been a very tough year so far for market-sensitive wealth managers like AMP, but if the company does nothing more than pay the 44c full-year dividend of FY07 then there's a 7% yield 85% franked at current prices with upside to a sharemarket recovery. The company says it understands the importance of dividends to AMP's retail shareholders and has structured its capital management to be able to sustain the dividend even during market volatility. At the AGM the Chairman said: "When we set our dividend, we take into account a number of key considerations. These include the underlying earnings of the company for the period in question and the sustainability of those earnings in future years. This allows for the impact that cyclical rather than structural market conditions may have on our results. While our policy is to pay out 85 per cent of underlying earnings as dividend, this has been varied in the past and can be in the future to see through the impacts of short-term market volatility."

Boral (BLD)
Price: $4.96
Recommendation: Buy
Moat: None
Business Risk: Medium-High
Pricing Risk: Medium

This is a well managed but cyclical business. Earnings are being weakened by the decline in housing in especially in NSW and USA. The share price has been hammered, leaving the stock reasonably priced and offering a generous fully franked yield. The Construction Materials segment, which provides around three quarters of the company's earnings, is benefiting from ongoing robust infrastructure investment activity. The stock is leveraged to a turnaround in property but the timing of this is uncertain. Only modest earnings growth can be expected on average over the longer term.

Fairfax Media Limited (FXJ)
Price: $2.78
Recommendation: Accumulate
Moat: None
Business Risk: High
Pricing Risk: Medium

The dramatic fall in share price means FXJ moves into our Accumulate range even on our pessimistic assumptions for long term profit growth. Do not be confused this is not the same FXJ of old which once dominated the newsprint industry through its tight grip on spending for classifieds. The risk profile of this business is now much higher with an industry quickly evolving to meet the requirements of the internet with a thirst for breaking news and video content. Profit growth will be more difficult and this could impact longer term dividends. The high risk profile means if FXJ is successful in transforming into a new media enterprise it will deliver significant returns. This stock is not suited for conservative investors.

GWA International (GWT)
Price: $2.60
Recommendation: Buy
Moat: Narrow
Business Risk: Medium
Pricing Risk: Low

This is a well managed business with a strong and conservative management team. It has strong market positions in most of its household products and is particularly dominant in toilets. Markets are not overly competitive and brand strength has allowed prices to at least hold during the housing downturn. Earnings are still likely to improve despite 85% of sales being from weak housing and renovations markets. Cost reductions and efficiency gains are a supportive factor. This is a strong cash generator with healthy margins and limited capital expenditure requirements. The balance sheet is strong with net debt/equity 46% and net interest cover seven times.

Hills Industries (HIL)
Price: $2.90
Recommendation: Buy
Moat: None
Business Risk: Low
Pricing Risk: Low

HIL shares have more than halved over the last year, with the market pricing in another round of sharp steel input price rises and the risk of a consumer downturn. There's also been aversion to small-cap industrials as a group. The market however has taken things too far. Despite hefty increases in steel input costs and margin damage from other sources in recent years, HIL has still been able to post the incremental gains in EPS and DPS we look for. And that is the most we expect. We recommend HIL for its high starting dividend yield and small, fairly steady gains in the annual payout. We never recommend it for fast capital growth. The company is conservatively managed and takes a low-risk, cautious approach to growth. Unless the economy is headed for a fully fledged recession we'd say HIL is undervalued. Even if directors hold the dividend steady at FY07 levels for the next two years, a fully franked 9.5% yield is available at current prices.

TELSTRA CORPORATION (TLS)
Price: $4.26
Recommendation: Buy
Moat: Wide
Business Risk: Medium
Pricing Risk: Medium

We believe there is a high degree of certainty in TLS delivering on its transformation targets between now and 2010. This should ensure that earnings, cash flow - operating and free - and dividend forecasts are achieved. In this challenging market this achievement should instill a high degree of comfort and underpins our positive recommendation. Based on our FY09 estimate, a fully franked yield over 6.5% - grossing to over 9.0% - should provide downside share price protection.

TLS remains a defensive stock in uncertain economic times. The consumer is facing pressure from high interest rates, rising food inflation and fuel costs. This is crimping mobility and communications and entertainment may well be the expenditure of last resort after food, clothing and shelter.

Aspect Huntley 22072008