by Jeff Reeves | February 7, 2012 7:00 am
Amid the volatility in 2011, many investors took shelter in high-yield blue chips with stable operations. Tobacco giant Philip Morris International (NYSE:PM) tacked on 35% last year. Utility stocks like Dominion (NYSE:D) and Consolidated Edison (NYSE:ED) tacked on 25% gains. All while the S&P 500 struggled to stay flat.
A focus on dividends persists in 2012, even though stocks have recorded their best January since 1997. After all, a little gain in your portfolio is not a sign that problems like the eurozone debt crisis or the beaten-down U.S. housing market have been solved.
However, you have to admit that investors hiding out in sleepy blue chips have missed the great start to 2012. The Select Sector Utilities SPDR ETF (NYSE:XLU) is actually in the red year-to-date despite the rally for the broader market, and the broad-based iShares Dow Jones Select Dividend ETF (NYSE:DVY) also is sitting on a loss. The income these investments provide is nice, but you’re still being left behind.
A good middle road to walk, therefore, is midcap companies with decent upside potential for shares that still pay out a substantial dividend. These stocks are riskier and the dividends sometimes can be less stable, but they also show the power of investing in a growth stock that pays a dividend instead of a mature business already bumping its head against the ceiling.
Here are five dividend midcaps to consider:
Founded in 1883, Leggett & Platt Inc. (NYSE:LEG) designs and manufactures a wide range of products used in items from home furnishings to automobile interiors to wires and tubing for industrial use. This is a true broad-based play on the recovery — but don’t let the old age of this stock fool you. Unlike sleepy blue chips that might have trouble ramping up to capitalize on demand, LEG has a market cap just north of $3 billion and is much more agile.
Fundamentally, Leggett & Platt is no slouch. Quarterly revenue has increased for seven straight quarters year-over-year, and annual profits have marched steadily upward despite the last few years of turmoil. In fact, fiscal 2011 EPS will be up over 60% above fiscal 2008 numbers!
Throw in a bulletproof dividend history and you have a real winner on your hands. Leggett & Platt has paid shareholders a dividend since 1939, just increased its dividend in October and currently boasts a 4.8% yield.
H&R Block (NYSE:HRB) is a strange stock. The company basically bleeds money all year long until it rakes in huge profits during tax season. Those numbers make or break the company. It’s the equivalent of getting an annual report instead of a quarterly one, and making your investing decision based on that.
The good news is that tax time is right around the corner — and the better news is that with more people employed and more people who will have income taxes to report, business could be up for H&R Block. At least that’s what appears to be the case, judging by recent news that unemployment is at a three-year-low 8.3% and judging by a 33% surge in HRB stock across the past 12 months.
Like Automatic Data Processing (NASDAQ:ADP), which processes payroll info for businesses, H&R Block is in many ways dependent on the broader business environment to make its money. That means you have growth potential in this midcap, and numbers should improve as the economy does in the months and years ahead.
Worried about buying H&R Block too soon? Well, consider the 4.6% yield. Even if you move sideways for a while, that’s a pretty good hedge for your portfolio to ensure you don’t miss the growth prompted by a broader recovery.
Retail stocks are not exactly known for big dividends. But American Eagle Outfitters (NYSE:AEO) offers an 11-cent quarterly payday that equates to a 3.1% yield. Granted, a flop in share prices from pre-recession highs has helped juice yields; the five-year return on AEO stock is about -60%. But the fact that American Eagle maintained a strong dividend payout is a big opportunity for growth investors.
AEO did $3.05 billion in sales across fiscal 2008 and is set to top that number for the first time this year. What’s more, fiscal 2013 forecasts are as high as $3.35 billion.
The biggest drag on shares is that full-year 2008 earnings were $1.82, and current earnings are roughly half that. But remember, you’re not investing in a sleepy blue chip here, but a midcap with the potential to ramp up.
There are hints that unemployment and consumer confidence are on the mend. That would bode very well for AEO stock. What’s more, even if American Eagle doesn’t soar in the next six months, your 3% dividend will be a nice sweetener if you have to hold this stock for a year or two to benefit from a retail bounce.
Cinemark Holdings Inc. (NYSE:CNK) owns movies theaters across the United States and Latin America, with a total of about 5,000 screens in America alone.
Cinemark has seen improving revenue each year since 2007, connecting with movie-goers despite the recession. That’s in part because of growth and acquisitions at a time when a lot of competitors are on the defensive instead of thinking about future profit opportunities.
The movie industry might not be booming right now, but CNK could cash in big-time when box office receipts improve thanks to its growth over the last few years.
And in the meantime? A 21-cent quarterly dividend equals a yield of 4.1%.
Investors already seem to be warming up to Cinemark. The stock is up by double digits so far in 2012 and is closing in on a new 52-week high.
Diebold (NYSE:DBD) is all about security, whether it be for businesses protecting account information or governments protecting classified intelligence. This is assuredly a growth industry due to secular trends. As we become increasingly reliant on digital communications, e-commerce and electronics records, the reliance on security services from companies like Diebold will only be greater with each passing year.
No wonder full-year profits for fiscal 2011 will be double 2009 numbers. Despite some hiccups due to cost cutting at governments and businesses during the recession, Diebold has come storming back. Shares are up 24% in the past six months to double the Dow Jones’ returns.
A 3.3% dividend yield is a nice selling point, too, because you will be ensured some income if cost-cutting again puts the squeeze on Diebold contracts or if competitors manage to challenge this industry leader.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace???.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the stocks named here.
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