5 Sluggish Stocks Worth Keeping for the Dividends

by Marc Bastow | October 5, 2012 11:20 am

It happens to everyone: You’ve done your research, find solid dividend-paying companies with histories of payout increases, and yet you feel slightly disappointed because these same companies have failed to achieve stock price increases even remotely close to the major index gains over the past year.

Your feelings are understandable, given that the S&P 500 has leaped over 32% year-to-date, while the Dow Jones Industrials has climbed nearly 27%. But while you wonder why your stock picks are faltering — we’ll get to that in a few minutes — at least get the satisfaction of knowing that 1) when you include dividends, your total return is bound to bump up a bit, and 2) you’re accumulating income or perhaps reinvesting the dividends back to purchase new shares, adding to your dividend payout in future quarters.

So what stocks are among the dead money laggards out there, the ones that didn’t keep up with market gains over the last year? I’ll bet these are some big names you might not have considered:

McDonald’s MCD 5% 77 cents 3.38%
Bristol Myers BMY 6% 34 cents 4%
Procter & Gamble PG 10% 56 cents 3.25%
Johnson & Johnson JNJ 11% 61 cents 3.52%
United Technologies UTX 13% 54 cents 2.74%

Perhaps the biggest surprise on the list is McDonald’s, but reading through the news over the last year, investors should have noticed a pattern of ups and downs in same-store sales and MCD earnings. The economic slowdown … or meltdown … in Europe hasn’t helped. But McDonald’s, being the nimble marketing and advertising company it is, has already put a number of new initiatives in play[1], from providing consumers with a calorie count[2] on its menu to meatless offerings[3] in India.

The Golden Arches just bumped up its dividend this quarter yet again, so hanging on to your shares is a no-brainer while you wait for some appreciation on the stock.

Bristol-Myers, on the other hand, might not be much of a surprise at all. While the pharmaceutical industry as a whole is fairly thriving, it’s been a rough year for BMY. The company took a huge $1.8 billion third-quarter charge[4] to write off its research efforts for a hepatitis drug, and the loss of patent protections[5] for Plavix and Avapro/Avalide will hurt because they account for revenues of $7.1 billion and $952 million, respectively. Ouch.

But the company stepped up big to try to fill the void through the acquisition of diabetes drug developer[6] Amylin for $7 billion, and Bristol Myers still has a medicine cabinet’s worth of drugs in an industry that’s sure to continue growing. So hang in there, especially with a dividend yield of nearly 4%.

For the sake of discussion, it’s worth lumping JNJ and PG together simply because that’s what Warren Buffett and his Berkshire Hathaway (NYSE:BRK.A[7], BRK.B[8]) company did earlier this year. Buffett took some of his massive pile of consumer stock chips off the table.[9] Of course, you won’t get the inside skinny on exactly why he did so, but such a move could telegraph some concerns over what might be considered a mature business segment.

Certainly, each of these stocks has its problems. PG is under immense pressure[10] to increase its share price from Pershing Square Capital’s William Ackerman, who controls $1.8 billion shares worth of PG stock. Perhaps that pressure is what led to a 5,700-person layoff earlier in the year. The good news is PG reported solid fourth-quarter earnings and outlined a (gulp) $4 billion share buyback program. The better news is the stock yields 3.25%, so time is on your side.

As for JNJ, sales have slowed[11] a bit, and the company is still dogged by the occasional recall. What appears to be a general period of sluggishness may really be no more than a short-term stumble.

However, investors have kept the share price down, and even with a price-earnings ratio of 21, the stock has languished. JNJ’s pipeline is still strong[12], the dividend continues to chug along and the buyback plan[13] is in full swing, so one has to wonder what Buffett sees that you or I don’t. In the meantime, I’ll take my 61 cents per quarter and 3.52% dividend yield, and hold on much, much longer.

Finally, we get to United Technologies, who’s 2012 has been marked by the acquisition of Goodrich (NYSE:GR[14]) for $16.5 billion and IAE for $1.5 billion. At the same time, it’s looking to dispose of or close down Pratt & Whitney Rocketdyne, Clipper Windpower and three Hamilton Sundstrand Industrial businesses: Milton Roy, Sullair and Sundyne.

The bottom line? Wall Street isn’t that thrilled with the potential for 2013, and investors have followed by holding off buying. The company reduced guidance numbers[15] for the year, and the expectations for future growth are tempered by United Technologies’ manufacturing-heavy profile. With a dividend yield of 2.73% (54 cents per share), this one could be worth waiting for, but keep a close eye on the fundamentals.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long JNJ.

  1. a number of new initiatives in play: https://investorplace.com/2012/09/mcdonalds-sales-rebound-should-you-buy-mcd/
  2. calorie count: https://investorplace.com/2012/09/mcdonalds-major-change-to-menu-boards/
  3. meatless offerings: https://investorplace.com/2012/09/mcdonalds-to-open-its-first-vegetarian-restaurants/
  4. third-quarter charge: https://investorplace.com/2012/08/bristol-myers-squibb-takes-1-8b-charge-for-failed-drug/
  5. loss of patent protections: https://investorplace.com/2012/07/should-i-buy-bristol-myers-squibb-3-pros-3-cons/
  6. acquisition of diabetes drug developer: https://investorplace.com/2012/07/bristol-myers-squibb-to-buy-amylin-for-7b/
  7. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.A
  8. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  9. consumer stock chips off the table.: https://investorplace.com/2012/08/buffett-bailed-but-should-you/
  10. pressure: https://investorplace.com/2012/09/why-pg-ceos-job-is-on-the-line/
  11. sales have slowed: https://investorplace.com/2012/04/should-i-buy-johnson-johnson-3-pros-3-cons/
  12. pipeline is still strong: https://investorplace.com/2012/10/experimental-type-2-diabetes-drug-proves-effective/
  13. buyback plan: https://investorplace.com/2012/09/jj-sometimes-buybacks-make-sense/
  14. GR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GR
  15. reduced guidance numbers: https://investorplace.com/2012/09/1-stock-you-must-own-1-you-must-sell-in-conglomerates-luk-utx/

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