Dear Mr. Berko:

I’d like to buy four or five income stocks and get about a 10 percent average annual total return over the next five years. My broker, who has become very conservative in the past eight months (he now only recommends fixed annuities, 10-year Treasury bills and AAA bonds) says that’s impossible. Can you recommend some stocks that would provide this kind of return?

R.R., Elkhart, Ind.

Dear R.R.:

With rates headed up, even 10-year bonds are certain to crash. Your goal is possible and here are a few issues that might get you there.

Altria Group Inc. (MO-$48.95) makes coffin nails, those nasty, smelly things called cigarettes that millions of people light to suck pungent, burning tobacco smoke into their lungs. MO makes Marlboro, Virginia Slims, Benson & Hedges, Merit and a few other infamous brands. MO also owns a huge block of Kraft Foods Inc. (KFT-$31.28) and KFT’s products, such as Post cereals, Oscar Mayer, Velveeta, Miracle Whip and Jell-O, account for nearly 40 percent of MO’s expected $88 billion in 2004 revenues. The company’s dividend, which has increased in each of the last 20 years, was boosted to $2.92 on Aug. 25 and now yields a comfortable 6.0 percent. Certainly MO has some significant court cases that must be settled, but it appears that the courts are setting aside some of the huge past verdicts. Some observers think that there might be a significant decrease in future tobacco litigation. Though I do not like MO (formerly Philip Morris), I think its dividend and potential dividend increases make this stock a compelling buy for income and modest growth.

New York Community Bancorp Inc. (NYB-$21.35) serves its customer base via 142 branches in New York City, Long Island, Westchester County and New Jersey. Earnings estimates for 2004 and 2005 were recently lowered to $1.80 and $1.93 per share, respectively, reflecting higher interest rates and lower mortgage volume. Though rising rates may dampen NYB’s appeal, I believe this company will continue to thrive and outperform its peers. Dividend growth has been extremely impressive, and the current $1 payout yields 4.7 percent. I think the company’s dividend will increase annually for the foreseeable future and has a good possibility of reaching $1.50 by 2009. NYB’s $11.21 book value, potential acquisitions and nonpareil management argue strongly in favor of owning these shares. Its price/earnings ratio of 13, compared with its average P/E of 16 during the past eight years, argues even more strongly in favor of owning this stock.

Weingarten Realty Investors (WRI-$33.62) is one of the oldest real estate investment trusts in the business. WRI owns more than 300 income-producing properties in 19 states. Rental income is up significantly, occupancy levels remain strong and a robust retail industry combined with good tenants and excellent properties places this company well ahead of its peers. The company’s dividend has increased in 23 of the past 25 years and the current $1.66 dividend (a yield of 4.9 percent) is likely to be increased to $1.72 in 2005. WRI expects to achieve higher returns on existing properties as leases come up for renewal.

Most of WRI’s tenants are large companies such as Albertson’s, Office Depot, Office Max, T.J. Maxx, Best Buy, CompUSA, Home Depot, Barnes & Noble, McDonald’s, Olive Garden, Outback Steakhouse, Taco Bell, Kohl’s, Marshalls, Borders, Bed Bath & Beyond, Lowe’s, Burger King, Dairy Queen, Pizza Hut, Walgreens and Target — just to name a few. These tenants give WRI stability and provide it an opportunity to expand when these big lessees look for new locations.

K-Sea Transportation Partners L.P. (KSP-$28.67) pays a $2.10 dividend for a yield of 7.3 percent. KSP provides refined petroleum products, marine transportation, distribution and logistic services in the Northeast. The company owns 34 tank barges, three tankers and 18 tugboats that serve major oil companies, oil traders and refiners. Its major customers are ChevronTexaco, ConocoPhillips, ExxonMobil and British Petroleum PLC. KSP, which went public last year, has $73 million in debt and less than 9 million shares out. I think this dividend could increase to the $2.50-$2.65 level in the next couple of years. More than 70 percent of its contracts are long-term, providing KSP with good predictability.

Valero L.P. (VLI-$53.35) owns and operates crude oil and refined product pipelines, terminals and storage assets that service refineries primarily in Texas, Oklahoma and California. VLI went public at $25 in 2001 with $98 million in revenues and a $1.10 dividend. This year, those revenues will probably exceed $215 million and the current $3.20 dividend (a yield of 6.0 percent) might be increased to $3.45.

These five issues should provide you with an attractive yield of about 5.7 percent and I believe each issue could increase its dividend annually during the coming few years. I also think that there might be modest annual appreciation from each issue averaging 5 percent to 6 percent annually for the next few years.

So, combining the dividend growth with principal growth, I think it’s not outside the realm of possibility for these five issues to produce a 10 percent average annual total return.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.