6 Low-Risk, Dividend-Rich Buys
Stocks made the bottom (Oct. 3) we were expecting, and while there will be fits and starts, the rebound now looks good to go for most of the fourth quarter and possibly into the first few weeks of 2012. But that doesn’t mean you should get complacent. Many signs point to a global economic slowdown next year, which may come back to haunt equities.
Smart investors should take advantage of rallies to shed stocks and mutual funds that lack strong defensive attributes. But what about stocks to buy?
Many of my favorite low-risk stocks are trading only a few percentage points below their 2011 highs. While that’s great if you already own them, it also means you need to be fussy with new purchases.
At this point, I would focus on the following four names, all of which are still cheap enough to allow at least a 15% total return (dividends plus appreciation) during the next 12 months.
#1: Abbott Laboratories
Abbott Laboratories (NYSE:ABT), a maker of drugs and medical devices, puts 10 cents of every sales dollar into R&D. Even better, the company has upped its dividend 39 consecutive years.
Last week, Abbott announced it will split into two companies — one concentrating on prescription drugs and the other embracing ABT’s remaining businesses (generic drugs, medical devices and nutritional products such as infant formula). I applaud the move, because I suspect rather strongly that the two stocks, added together, will be worth more than Abbott alone.
Buy ABT on pullbacks below $52. Current yield: 3.6%.
#2: Johnson & Johnson
Johnson & Johnson (NYSE:JNJ) is the world’s strongest health care enterprise, with a AAA credit rating and a finger in every pie — from drugs, stents and orthopedic devices to consumer products like Band-Aids and Tylenol. And the company has increased its dividend 49 years in a row.
Last week, JNJ bumped up (slightly) its profit forecast for 2011 — a hint that the drag from the well-publicized manufacturing pratfalls earlier this year may be easing. At 12 times this year’s estimated net, the stock is trading at barely one-third its peak P/E of the past 25 years, recorded in 1999. Discounts of that magnitude dramatically reduce risk while enhancing long-term reward.
Buy JNJ under $64.60. Current yield: 3.5%.
Pepsico (NYSE:PEP) boasts 19 brands with annual sales over $1 billion, and it is projected to grow faster than archrival Coca-Cola Company (NYSE:KO) through 2016. I love PEP’s strategic thrust into more nutritional product lines, including hummus, salsa and dips. According to a new study by the Robert Wood Johnson Foundation, companies that produce better-for-you foods also generate superior long-term financial results.
Earlier this month, PEP reported sales and profits that neatly topped Wall Street estimates. Operating net per share jumped 10% versus the year-ago period, despite the company’s well-publicized struggles with rising commodity prices. It’s rare among food-and-beverage stocks to find one trading close to the same P/E ratio it fetched at the major bottom in early 2009. Yet PEP fits that description. And the company has sweetened its dividends yearly since 1973.
Buy PEP below $65. Current yield: 3.3%.
Anglo-Dutch producer of foods and soaps, Unilever (NYSE:UL), is remaking itself under brilliant ex-Nestle exec Paul Polman. One move in particular that I like is that the company is targeting upscale customers with PF Chang’s frozen noodle entrees.
Dividends have surged 55% (in British pounds) over the past four years. UL now pays quarterly (mid-March, June, etc.). And with no UK withholding tax, the stock fits nicely into retirement accounts.
Buy UL on pullbacks below $32. Current yield: 3.6%.
Next >> An ETF Alternative
#5: PowerShares S&P 500 Low Volatility Portfolio
If your cash hoard is running thin, you can opt to buy a very conservative ETF alternative and get 100 safe, stable stocks in a bundle with the PowerShares S&P 500 Low Volatility Portfolio (NYSE:SPLV).
The fund is rebalanced quarterly to keep you in the market’s steadiest names, and its current yield is a generous 100 basis points more than a 10-year Treasury note.
Buy SPLV anytime the S&P 500 index is quoted at 1,230 or less. Current yield: 3.2%.
Next >> Bonds That Beat Stocks
Bonds That Beat Stocks
According to my proprietary stock-valuation model, which uses very conservative inputs for earnings growth and P/E ratios, it’s now reasonable to expect the S&P 500 index to generate a 7.3% compound annual return over the next 10 years.
That’s certainly a lot better than 2.2% on a 10-year Treasury note. A decade hence, if my projections pan out, $10,000 invested today in the S&P will grow to approximately $20,200. The same stake in a T-note, with reinvested interest, will increase to just $12,500.
But wait a minute. To earn those outsized returns, a stock investor must put up with huge monthly, weekly and even daily price swings. Isn’t there some way to beat the T-note without bungee-jumping your portfolio?
Yes, there is. In fact, emerging-markets bonds have the potential to make almost as much money for you as the stock market in the coming decade, with roughly 30% less risk.
In recent years, most U.S. investors have heard complimentary things said about the developing stock markets of the world (especially Brazil, Russia, India and China — the so-called BRIC countries). The real unsung story, though, has to do with the emerging countries’ bond markets.
Only 13 years ago, in the fall of 1998, the developing world was a basket case. Russia had just defaulted on its debt. Indonesia, Korea and Thailand were facing currency and debt crises on much the same order as Greece today. Through severe fiscal retrenchment, both the private and public sectors in most emerging countries healed their balance sheets. An economic boom followed, which continues, more or less unabated, to this day.
As a result, the developing countries now hold 60% of the world’s foreign-exchange reserves. (No more currency-devaluation threat.) Even more to the point, from a bond investor’s perspective, the typical government in the emerging markets carries less than half as much debt, relative to GDP, as the United States. Investment-grade corporations domiciled in emerging markets are shouldering nearly 40% less debt, relative to equity, than their counterparts in developed economies.
In short, emerging-market bonds generally are far less risky than they were a decade ago. Yet these bonds still command exceptionally high yields, in many cases approaching or even exceeding the total return I’m forecasting for the U.S. stock market over the next 10 years.
#6: TCW Emerging Markets Income Fund
For safety, I recommend buying a well-diversified fund of emerging-market bonds, such as no-load TCW Emerging Markets Income Fund(MUTF:TGINX). Over the past five years, the TCW fund’s share price has fluctuated, month to month, 34% less than the S&P 500 index.
I’m not saying TGINX is some kind of money market fund. The share price will bounce around, sometimes more than you might like — such as in late September and early October, when investors around the globe worked themselves into frenzy over the woes of the European banking system. Compared with a typical stock fund, however, TGINX is a model of stability. If you’re tired of the Dow’s extreme volatility, here’s an opportunity to take a break and still earn stock-like returns.
Buy TGINX under $10.75, available fee-free through leading discount brokers. Minimum to invest: $2,000. Current yield: 7.4%.
For a slightly higher yield, buy the fund’s Institutional Class shares (MUTF:TGEIX). It has the same $2,000 minimum and no ongoing 0.25% annual distribution fee. However, you’ll pay a transaction fee if you buy through a broker rather than directly from the fund. Current yield: 7.6%.