The Federal Reserve indicated that economic growth would remain anemic for some time as would interest rates. Indeed they announced that short rates would remain near zero through at least mid 2013! That unprecedented statement should remove some uncertainty for companies planning their capital budgets.
With market indices down 15-18% from the yearly highs set in April, we are clearly in a “corrective” mode, and it will take time and action to restore investor confidence. With the Dow Jones Average as a group’s dividend yielding more (2.65%) than that of the 10 year Treasury bond (1.9%), we find it tough to say that stock prices are too high. Indeed, the case can be made that a AAA rated company like Johnson & Johnson (JNJ) paying a 3.6% annual dividend that gets raised every year is a safer bet than a AA+ US Treasury bond paying a fixed 1.9% interest for 10 straight years. There are many other stocks that fit the JNJ mold as well (see below).We also expect many companies to start spending their hordes of cash on stock buy-backs, dividend boosts, mergers, and other investor-friendly actions.
Compared to other investments, stocks appear attractive at current levels (DJIA 11,150), unless we slip into another recession – a small but definite possibility.
The Fed is telling us that short term bond investments, while safer than stocks, will not be providing much yield for the next two years at least. Given the low yields of CDs, money-market funds, and Treasury securities, skittish investors might consider combining a mix of these “safe” investments with a group of dividend-paying stocks. Even if the stock prices remain unchanged a year from now, their dividends will allow the overall portfolio to grow at a decent rate. Obviously, if the companies continue to perform as in the past, their share prices could gain nicely.
We list a few of the many large companies in a variety of industries with a long history of annual dividend increases that are trading at attractive current yields:
Abbott Labs (ABT) - Drugs 3.90%
Chevron (CVX) - Energy 3.30%
Intel (INTC) - Semiconductors 3.90%
Johnson & Johnson (JNJ) - Diversified Health. 3.60%
Leggett & Platt (LEG) - Diversified Manuf. 5.60%
McDonalds (MCD) - Restaurants 2.80%
Microchip Tech (MCHP) - Semiconductors 5.20%
Plains All Amer. (PAA) - Energy Pipeline 6.55%
Average yield = 4.35%
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