There’s a lot of focus on low-risk, blue-chip investments today. That type of investing strategy is a good one for volatile times, and taking shelter in big-name companies with global operations and a good dividend can offer stability to your portfolio.
But don’t be fooled into thinking that all the big boys are the same. Even in the vaunted Dow Jones Industrial Average, there are a number of big-name stocks that are big-time disappointments. These dead Dow stocks have caused investors more stress at a time when they were looking for stability.
If you’re considering blue chips right now, make sure your shopping list steers away from these toxic investments. Here are five dead Dow stocks you can live without right now:
Bank of America
It’s ironic that Citigroup (NYSE:C) was the company that got kicked out of the Dow Jones during the financial crisis, but Bank of America (NYSE:BAC) remains the biggest lightning rod for anger at the financial sector. There are many reasons everyone hates BofA, but investors have plenty of fodder without dipping into public outcry. Bad debt from Countrywide continues to erode the bottom line. Lawsuits over robo-signing and shady lending practices loom. Bank of America earnings remain ugly when you back out one-time gains from asset sales and accounting gimmicks. This stock is down 50% year to date in 2011 for a reason — don’t go bottom fishing in Bank of America.
There is no doubt McDonald’s (NYSE:MCD) has been a great investment lately and is a great blue-chip stock. It is growing despite an already dominant business, it pays a nice dividend and it has a bulletproof brand. However, investors need to separate past performance from future returns. The fact is MCD stock is up 250% since 2004 and has doubled since 2007 — and that growth might not be sustainable. MCD’s price-to-earnings ratio is pushing 17, when the Dow’s average P/E is closer to 12. Yes, there is projected growth that could push up earnings, but it’s very likely the success already is baked into MCD stock after a huge run in the past few years.
Procter & Gamble
Procter & Gamble (NYSE:PG) is a stable consumer stock with huge brands like Gillette, Pampers and Duracell. But it’s also a sleepy investment that has gone nowhere for five years, and total revenue remains below 2008 levels. What’s more, the nature of its business leaves P&G open to fluctuations in commodity prices — meaning margins could get pinched by soaring costs of raw materials and energy going forward. Throw in the fact that store-brand sales have been brisk as consumers look to save a few dimes on cheaper cleaning products and other staples, and you have a recipe for little or no growth at P&G in the immediate future.
JPMorgan Chase (NYSE:JPM) is more stable than the aforementioned Bank of America. However, the company reported weak earnings recently that show it hardly is out of the woods. A massive 33% profit decline was revealed in its latest quarter, thanks to a 13% decline in investment banking income. Mortgage fees and other consumer fees were indeed up, but this kind of earnings volatility — not to mention the same funny accounting tricks that BofA uses to juice profits on paper — makes it hard to trust the numbers. Worst of all, even if the numbers are good, you can’t trust the stock. Consider that JPM stock was down 25% in August due almost exclusively to investor sentiment. You don’t want to hang the success of a stock on the psychology of the market, so steer clear of JPMorgan for now.
After slashing its dividend from 31 cents per quarter to 10 cents, General Electric (NYSE:GE) was one of the biggest villains of the Dow during the financial crisis. The dividend has mildly recovered to 15 cents, and the stock recovered in kind — until it peaked at $21.50 in February then plummeted back to around $16 per share. Lingering credit troubles at GE Capital continue to weigh on the bottom line, the Japan nuclear disaster earlier this year has put a damper on the company’s GE Energy reactor business, and broader consumer spending woes continue to hurt General Electric appliance sales. Revenue and profits still are down significantly from 2007 numbers, and growth has been very sluggish across the past several quarters. GE isn’t going away anytime soon, but it also might not see its shares go up, either.
Jeff Reeves is the editor of InvestorPlace.com. Write him at [email protected], 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 aforementioned stocks.