Despite a barrage of wicked headlines from Europe, domestic equities have held their ground remarkably well in recent weeks. The headline indices likely will make one more upside run in December, lifting the S&P 500 to 1,300 or a little higher.
After that, the crystal ball clouds over. I’m not ruling out a happy resolution to Europe’s problems, but I’m not counting on it. The $64 trillion question, of course, is whether the slump will spread to other parts of the world, including the United States. Within a few months, we’ll know.
Meanwhile, the flow of events “over there” bears an eerie resemblance to America’s mortgage crisis as it unfolded in late 2007 and early 2008. Policymakers tried to stick one patch after another on the deflating balloon. None of the fixes worked for long. Ultimately, stock markets worldwide paid the price.
It might not be too late to avoid a similar fate this time — if Greece and now especially Italy grasp the nettle and promptly carry out their promised fiscal reforms. However, the capital markets’ patience has just about run dry.
To cope with this high-risk environment, replace high-volatility stocks with safer dividend stocks. As a rule of thumb, any stock that fell more than 25% during the July/August swoon is a candidate for elimination. Replacements should throw off a dividend yield of at least 3%.
Here are five such dividend stocks to buy now:
Dividend Stock #1: Clorox
During the spring and summer, takeover speculation swirled around Clorox (NYSE:CLX), the maker of bleach and Glad bags and Brita water-filtration systems. At one point, in fact, activist investor Carl Icahn proposed buying the company for $80 per share.
However, Icahn has since backed away, and the takeover groupies have exited the stock. Result: The share price has cooled down, presenting an opportunity for patient, long-term investors. Not only does CLX throw off a generous 3.7% dividend, but the company also has upped its payout 34 years in a row. The latest increase (in May 2011) amounted to a healthy, inflation-beating 9%.
What to do now: Buy CLX up to $66.70. From today’s level, I’m projecting a total return (dividends plus price gain) of 12% to 15% in the year ahead.
Dividend Stock #2: Waste Management
Waste Management (NYSE:WM), the trash hauler, operates a steady, recession-resistant business — just the ticket in a sluggish economy. Moreover, judicious bolt-on acquisitions are helping the company to fatten its bottom line through economies of scale. The trash industry is highly fragmented, inviting consolidators like WM to take over smaller rivals and squeeze out overlapping costs. Topping off the investment case, the shares yield 4.4%. Dividends, piled higher each year since 2004, have grown 54% in the past five years alone.
What to do now: Buy WM up to $33.10. As with CLX, I’m projecting a total return (dividends plus price gain) of 12% to 15% in 2012.