5 Dividend Stocks That Could Trump the Dow
December 29, 2010 – by Richard Band
Where Are the Safe Profits?
December was a banner month for the best stock picks with the market on course to post its best December in nearly two decades. But before you go thinking it’s smooth sailing in 2011, understand that some serious risks will carry over from the old year into the new — such as the threat of a debt default by financially strapped European governments or the unraveling of the Chinese economic “miracle.”
So investors should be on the lookout for opportunities where they can make big gains with an adequate degree of safety. In my judgment, raw materials (gold, silver, oil) offer the biggest upside potential in 2011, but also carry the greatest risk. For the best combination of growth and safety, I continue to award top billing to the dividend stocks on this list. In addition to providing a steady stream of income, these stocks should easily outpace the Dow in the new year.
Abbott Laboratories (ABT)
Some investors overlook health care giant Abbott Laboratories (NYSE: ABT) because its business model seems “complicated” — prescription and generic drugs, medical devices (ABT is the market leader in stents), and nutritional supplements. However, that’s precisely Abbott’s appeal. A diversified product line mitigates the company’s risk from patent expirations, safety issues and plain, old competition.
Small wonder ABT is cruising for record profits while many pure drug makers are struggling. What’s more, Abbott will likely tack on another 10% to 12% to its bottom line in 2011, when many rivals will find earnings growth harder to come by. At less than 11 times 2011’s estimated net, the stock is trading at half its most recent peak valuation in early 2007.
The dividend, sweetened 38 years in a row, works out to a current yield of 3.7%. From today’s level, I’m projecting a total return — price gain plus dividend — of 20%-plus in the year ahead. Buy below $54.
At a time when other tech outfits were blowing their cash on overpriced acquisitions, Microsoft (NASDAQ: MSFT) decided to play a completely different card. CFO Peter Klein canvassed institutional investors to find out how they thought the company should spend its $37 billion wad. The consensus was that MSFT should pour more cash into dividends and stock buybacks, not takeovers, and the company listened. In September, Microsoft announced it would raise its quarterly dividend 23% to 16 cents a share. It currently yields 2.3%.
Meanwhile, MSFT looks remarkably cheap from a long-term point of view. In an effort to be ultraconservative, I calculated what the stock would return, over the next decade, if: 1. The current depressed P/E ratio (a little over 10 times year-ahead earnings estimates) remained unchanged; and 2. Microsoft’s earnings growth rate slowed 20% from what the company accomplished in the past decade. Result: The stock would log a total return of 9.4% annually, about 45% more than the S&P 500 Index under similarly severe “new normal” assumptions. Would you really rather own an index fund? I think not. Buy MSFT below $28.
Though an all-American icon, Pepsico (NYSE: PEP) is now deriving most of its growth from emerging markets. The company’s snack business generates almost 37% of its volume in emerging markets, and the beverage business generates 44% in emerging markets.
PEP currently yields 2.9%. From here, I’m projecting a total return of 15% to18% in the year ahead. Buy below $66.
Time Warner (TWX)
Time Warner (NYSE: TWX) may not be a keeper forever and a day, but I am impressed with the recovery this media powerhouse has made in the past 18 months. Despite ongoing softness in the magazine segment, Time Warner’s video-content businesses (cable programming and movies) propelled 2010 earnings to a three-year high. Another 10%-12% profit gain appears within reach in 2011.
At 12 times estimated 2011 earnings, the stock is trading at about half the multiple it fetched four years ago. That leaves enough leeway, in my judgment, for TWX to generate a total return of 15% or more before the market bumps into major resistance in late 2011. The current yield for TWX is 2.6%. Buy below $32.
Based in Omaha, Neb., smack dab in America’s breadbasket, ConAgra (NYSE: CAG) is known for a powerful lineup of consumer brands, including Banquet, Healthy Choice, Marie Callender’s, Egg Beaters; Hebrew National franks, Hunt’s, Orville Redenbacher’s, Peter Pan peanut butter, Wesson oil, and many more.
In recent years, the company has steadily lowered its risk profile by selling its volatile commodity-trading business and paring debt. Meanwhile, management has aggressively bought back stock and raised the dividend, which had been cut in 2006 under a previous regime. Yielding a lip-smacking (and safe) 4.1%, I’m targeting a share price of $26 within a year, for a total return of more than 20% from here. Buy below $23.