10 picks for value, growth, income
Based on historic patterns of yield, these blue-chip stocks now offer excellent total return potential.
By Kelley Wright, Investment Quality Trends
A cash dividend is the most fundamental measure of return on investment, and it reveals several critical attributes about a company.
First, a dividend tells us the company has earnings. Second, a rising dividend trend suggests the company's earnings are increasing. Next, dividend increases reflect management's optimism about earnings. And last, a long-term track record of consistent dividend increases is a predictor for a rising stock price.
Putting this all together, we find that high-quality companies with long-term track records of dividends and dividend increases tend to fluctuate between two dividend yield areas -- one in which the price is low and the yield is high and the other in which the price is high and the yield is low.
Our contention is that the high-yield/low-price area represents good historic value. This means that over long periods this is the dividend yield area where a price decline has stopped.
This occurs ostensibly because knowledgeable buyers believe the return on investment from the current cash dividend, which determines dividend yield, and the capital appreciation potential is simply too attractive to pass up.
Does buying a stock at its historically repetitive area of undervalue guarantee the stock will not decline below that area? No, in the midst of a panic, rational thought goes out the window, as do stock prices.
What buying at a historically repetitive area of undervalue provides an investor is a position in a really good company that has historically provided an excellent long-term total return from that area; nothing more, nothing less.
Based on this strategy, The Timely Ten represents our top 10 recommendations, made up of historically undervalued stocks that show exemplary long-term dividend growth.
These stocks also have a price-to-earnings ratio of 15 or less, a payout ratio of 50% or less, debt of 50% or less and technical characteristics that suggest the potential for imminent capital appreciation.
The current Timely Ten are:
Eaton Corp. (ETN) -- yielding 3.5%
Chevron (CVX) -- yielding 3.7%
ExxonMobil (XOM) -- yielding 2.9%
Coca-Cola (KO) -- yielding 2.7%
Johnson & Johnson (JNJ) -- yielding 3.9%
Union Pacific (UNP) -- yielding 2.2%
Air Products & Chemicals (APD) -- yielding 3.2%
United Technologies (UTX) -- yielding 2.6%
Procter & Gamble (PG) -- yielding 3.6%
Occidental Petroleum (OXY) -- yielding 2.7%
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John Stumpf acknowledges that growth has been slow, but he says he's still optimistic.
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