Am I saying that we have hit bottom? No. There are plenty of macro challenges out there and things could easily get worse before they get better.
On the other hand, valuations are extremely attractive. Focus on companies that have stood the test of time and can provide you with a good income while you wait for things to improve. Look for dividends that will not only be maintained, but are likely to grow over time.
Screen for These Good Things
The list below should give you some ideas to work with. It shows the stocks with market caps over $500 million that have dividend yields over 3.0%, payout ratios less than 60%, have grown their dividends by more than 10% per year over the last five years. They also all have single-digit P/Es based on next year’s earnings, and I have eliminated all the stocks that have Zacks #4 Ranks (Sell) and Zacks #5 Ranks (Strong Sell).
Since I wanted companies that have strong balance sheets, I also eliminated any firm where the ratio of debt to equity was more than 1.0. Further narrowing down the list, I eliminated all firms where the expected earnings over the next 12 months is lower than the earnings they have recorded over the trailing 12 months.
Investing - Not Trading
What I am talking about is long-term investment, not short-term trading. Thus the Zacks Rank is less important, but you still don’t want to be trying to catch a falling knife. A low P/E based on current forward earnings does not do you much good if the earnings estimates are being slashed.
If you see a good company with a solid dividend yield and a history of growing its dividend at a solid rate that has a Zacks #4 Rank or Zacks #5 Rank, just put it on your watch list. Ideally you would wait until it has a Zacks #1 Rank (Strong Buy) and Zacks #2 Rank (Buy), but if you really do plan to sock it away for a long time, a Zacks #3 Rank (Hold) is OK.
An equally weighted portfolio of these 15 stocks would provide you with a yield of 4.07%, far above what you could earn even in the 30-year T-bond. The average P/E is just 7.27 based on 2012 earnings. Only one of them are paying out more than half of their earnings now, so there is very little danger of any of the dividends being cut anytime soon.
The equally weighted portfolio would have grown your income by 16.16% over the last five years. If they were to continue to raise their dividends at that pace, in five years your average yield on cost would be 8.61% and in ten years it would be 18.16%. That could provide you with a very nice retirement income.
The first table focuses on the dividend characteristics of these firms.
|Company||Ticker||Div Yield||Payout Ratio||Zacks Rank||Div 5-Yr Growth||P/E Using Next FY Est||Market Cap|
|Rwe Ag -Sp Adr||RWEOY||9.41%||0.51||2||12.26%||4.65||$20,779|
|Total Fina Sa||TOT||5.66%||0.39||3||12.15%||5.66||$110,903|
The second table focuses on the balance sheets of these firms. While buying stocks is very much in the “Risk On Trade” camp, in this environment you don’t want to be taking too much risk. None of these stocks is leveraged to the eyeballs. Only two have debt that is more than 50% of equity. Most have significant amounts of cash on their balance sheets relative to their market capitalizations.
Despite the large amount of cash -- an asset in the current environment -- and low leverage, these firms have earned on average 20.56% on their equity over the last four quarters. None of these firms is likely to disappear, except perhaps by takeover, anytime soon.
|Company||Ticker||Debt/Equity||Current Ratio||Interest Coverage||Return on Equity||EPS Est Growth Next 12 Mo.||Cash & Mkt Secs Qtr ($mil)|
|Total Fina Sa||TOT||33.00%||1.25||40.27||18.46%||20.99%||$19,264|
|Rwe Ag -Sp Adr||RWEOY||0.00%||1.08||N/A||17.12%||10.01%||$10,011|
CONOCOPHILLIPS (COP): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
REPSOL SA-ADR (REPYY): Free Stock Analysis Report
TOTAL FINA SA (TOT): Free Stock Analysis Report
Zacks Investment Research