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Two Low-Risk Dividend Stocks To Hide Out In

May 04, 2010 – by Richard Band

The market had what can charitably be called an “interesting” session yesterday that has sparked fears of a worldwide debt crisis. But while some vigilance is called for in the short-term, the panic another white-knuckle ride for the market like we saw in late 2008 is a bit overblown. By making smart, low-risk moves you can limit your risk in the short term if things continue to stay rocky and still tap in to Wall Street’s big long-term potential.

How can I be so confident the market has long-term potential? Well, before this week’s antics the major indexes picked up more ground in the past 13 months than in any similar time frame since 1933. Even the monster surge in 1982-83 that kicked off the greatest bull market of our lifetimes only boosted the Standard & Poor’s 500 index 68% in 14 months. One volatile day and allegations of a trader with a “fat finger” can’t change that.

Given the power we’ve seen to date, I think the underlying “primary” up trend will probably carry through year end and well into the first quarter of 2011. But I’ll admit, I’ve very cautious about the next four to six weeks, and perhaps a tad longer if the euro zone continues to drag its feet on a fix to its debt problems. The reality is that we could see another 5%-10% dip in the indexes this spring and summer.

So for the moment, I suggest a more defensive tack, stressing companies that pay generous dividends and that have stable share prices. This will limit your downside risk if things stay volatile and ensure you have a reliable quarterly paycheck in addition to big potential for share appreciation.

Two dividend stocks look ripe for buying now…

Dividend Growth Stock #1 – Merck & Co., Inc. (MRK)

In 2009, Merck & Co., Inc. (NYSE: MRK) absorbed rival Schering-Plough, opening the way for the combined enterprise to cut costs and concentrate its research efforts on the most promising medicines in the pipeline.

Earnings per share touched a new all-time high in 2009, and will likely progress another 20% or so over the next two years as the merger savings kick in. Surprisingly, perhaps, MRK never slashed its dividend during the Vioxx crisis and may, at last, be poised to sweeten the payout some time within the next 12 months. MRK’s current yield is 4.2%.

By 2013, based on the company’s cash-generating potential, I project a total return of 55%-75% even if the overall market goes nowhere. Buy MRK at $40 or less.

Dividend Growth Stock #2 – Exelon Corporation (EXC)

Exelon Corporation (NYSE: EXC), the nation’s largest owner-operator of nuclear power plants, stands to benefit from increasingly stringent limits on carbon emissions in the years ahead.

At the moment, electricity demand is down, depressing wholesale power prices. (EXC earns about 70% of its profits from sales to other utilities.) Thus, I expect the company to report a modest dip in 2010 earnings. However, a rebound is likely in 2011 — and the stock is very cheap at less than 12x this year’s trough earnings. As recently as mid-2008, EXC sold for 22x net, so you’re getting a 45% discount off the peak valuation.

EXC’s current yield is 4.8% — and safe. Even at this year’s low run rate, profits cover the dividend by a comfortable 1.8x. Buy EXC at $46 or less.

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