Regardless of the economic conditions, investors never have the excuse to be careless. Conditions could change — so we must keep our weather eyes wide open.
All the more so because stocks today are expensive by most historical measures. If you’re an investor committing new cash, there’s little room for error. To protect yourself, I urge you to maintain a balanced portfolio, with an ample helping of fixed income (bonds and cash).
Assuming you’ve got a portfolio you can sleep comfortably with, I advise you to focus your new stock buying on names that furnish a generous dividend yield up front, with the potential for increasing your payout faster than the cost of living in the years ahead. These outfits will let you play defense and offense simultaneously.
Here are my three priority picks at the moment, all yielding at least half-again more than a 10-year Treasury note:
General Electric Company (NYSE:GE)
Current Dividend Yield: 3.4%
After dragging its heels for years, General Electric Company (NYSE:GE) has finally gotten serious about shrinking its financial arm, GE Capital, which nearly sank the industrial conglomerate in 2008. In March, General Electric disclosed plans to sell its Australia/New Zealand consumer-finance business for $6.3 billion in cash and assumed debt.
On April 10, a dramatic announcement followed: GE will sell the bulk of its financial operations over the next two years, slashing its earnings contribution to less than 10% of GE’s total by 2018.
GE stock has already spiked on the news, but there could be further upside if CEO Jeff Immelt, widely mistrusted by investors, were to retire. (Immelt declared himself “a complete believer in our company and our strategy” in April 2008, a few months before GE nearly collapsed.)
Microsoft Corporation (NASDAQ:MSFT)
Current Dividend Yield: 2.5%
New CEO Satya Nadella speaks more softly than his blustery predecessor, Steve Ballmer, but is getting more done. In the past year, Microsoft Corporation (NASDAQ:MSFT) has taken aggressive steps to get its office software adopted on mobile devices and throughout the cloud.
Microsoft has also made significant cost cuts, eliminating wasteful pet projects favored by previous management.
Meanwhile, the liberal 2.5% dividend, now close to a five-year high, puts a “value floor” under MSFT stock around $40. As Nadella pushes forward with his plan to shift the Microsoft business mix into newer, faster-growing lines, I think MSFT stock will crank out a total return of 50% or more before the end of the decade.
Procter & Gamble Co (NYSE:PG)
Current Dividend Yield: 3.3%
By the time you read these words, Procter & Gamble Co (NYSE:PG), the Cincinnati-based maker of Crest, Tide, Pampers and Gillette products may have boosted its dividend for the 59th year in a row.
But that’s only the beginning of PG stock’s appeal. CEO A.G. Lafley, summoned out of retirement in 2013, has put Procter & Gamble on a “biggest loser” diet.
PG will shed approximately half its brands (those with the lowest profit margins). When the process is complete, probably by the end of this summer, earnings should accelerate as Procter & Gamble pours cash, for innovation and marketing, into its strongest products.
Don’t fret media reports that PG may be about to dispose of a large chunk of its beauty business (haircare, cosmetics and fragrances). These brands are valuable, but the competition is excruciating, and margins are under severe pressure.
Either Lafley or his likely successor, David Taylor (56), will be able to put Procter & Gamble’s resources to better use.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.