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Dividend Stocks with Money-Doubling Potential – CHL, PNY, PEG

October 30, 2009 – by Richard Band

After weeks of teasing, is the stock market is finally giving us a real “correction”?

Market setbacks always provide a good occasion for us to recheck our premises. Is the major uptrend still intact? If so, we should use this dip to beef up our equity holdings.

On the other hand, if the selling reflects a significantly worsening economic outlook, we should adopt a more cautious policy (hedging, selling any subsequent rallies, etc.).

Fortunately, it appears that the market is simply digesting its monster gains of the past seven months.

The U.S. economy is emerging from its deepest downturn since World War II. In the early stages of a business recovery, it’s common for the statistics to paint a mixed picture. This week, for example, the Commerce Department reported that sales of new homes fell 3.6% in September, the first monthly drop since March. Economists had predicted a gain.

Of course, just last week, the National Association of Realtors reported that sales of existing homes surged 9.2% in September. Since existing homes make up more than 90% of total home sales, last week’s number was by far the more important.

We can expect a few more bumps (and bruises) over the next couple of weeks as the market adjusts to the fact that many parts of the economy are still struggling. However, I don’t foresee a huge drop in the Dow from here. Most of the damage is probably behind us.

Accordingly, you should take advantage of the current weakness to do some buying. Not overpaying, mind you, but buying good-quality stocks that have the potential to give you solid returns.

Since early March, electric, gas and water distributors have lagged the blue chip indexes by a wide margin—to such an extent, in fact, that I think the pendulum may be just about ready to swing in the other direction.

For income seekers, now is an excellent time to build a stake in these classic high-dividend vehicles. I’m steadily accumulating them myself (one of the few market niches where I’m buying aggressively at the moment). Over the next three to five years, I figure, some of the most undervalued stocks in the group will probably double my money, including reinvested dividends.

Telecom stocks are a special category. Domestic telcos are coping with a renewed onslaught of competition from the cable providers, which threatens to erode the franchise value of both parties. On the other hand, big-name telco stocks like AT&T (T) and Verizon (VZ) are cheap by almost any yardstick, and their dividends don’t appear to be in any immediate danger. It’s OK to nibble at T (below $27) and VZ (below $31) for income, but don’t go overboard. Current yields exceed 6%.

Dividend Stock #1 – China Mobile (CHL)

For greater total-return potential, I prefer China Mobile (CHL). With a staggering 493 million cell phone customers and a market value of $200 billion, CHL ranks among the bluest of China’s blue chips. Unlike Sprint (S) and other troubled U.S. wireless carriers, China Mobile keeps debt to an absolute minimum, financing nearly all its growth through internal cash generation.

Most likely, CHL won’t be able to triple its sales over the next five years, as it did from 2003 to 2008. However, I still expect the company to grow considerably faster than most Western telecoms. In addition, CHL’s ample cash flow gives the directors plenty of room to hike the dividend. (The stock already yields 3.4%.) If you’re headed into retirement and you’re concerned, as I am, about the future purchasing power of the dollar, you need stocks like CHL that can deliver a rising income stream over the long run. Better yet, CHL pays in a strong currency—the yuan—that will almost certainly appreciate, in time, against the sickly greenback.

Dividend Stock #2 – Piedmont Natural Gas (PNY)

I have been following North Carolina-based Piedmont Natural Gas (PNY) since March 1990. (Yikes, that long ago!) If you were invest in PNY then and hang on the whole time, reinvesting your dividends, you’ve clocked a total return of 1,390% on your original investment.

Even more remarkable, PNY still offers great value today. At a yield of 4.5%, the stock throws off about 20% more cash for each dollar you invest than the average gas utility. Yet Piedmont is anything but average, having sweetened its dividend every year since 1979. Over the past decade, the dividend has grown 56%, well ahead of the cost of living.

While the recession has clearly dented the company’s service area, I believe that, in the years to come, the Carolinas economy will again grow faster than the nation as a whole.

Dividend Stock #3 – Public Service Enterprise Group (PEG)

Public Service Enterprise Group (PEG), fondly known as Peggy to generations of stock traders, has delivered electricity to densely populated northern New Jersey since 1903. In recent years, PEG has also branched out into wholesale generating (producing and selling power to other utilities). Many utes have found the wholesale business too hot to handle, but Peggy has wisely maintained a conservative financial profile— and chalked up consistent profits. In fact, record earnings are pretty much in the bag for 2009, with another (though smaller) gain likely next year.

At last glance, PEG was quoted at a beggarly 5.9 times cash flow. As a rule of thumb, I consider an electric utility to be a takeover candidate when its share price falls below 7.5 times. Peggy is already there. If a suitor showed up, you could pocket a 25%–30% return on your money, virtually overnight. Current yield: 4.3%, more than a Treasury bond. PEG is an excellent buy.

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