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In previous articles I have outlined certain essential stock types that income portfolios should contain, including: anchor stocks, utility stocks, and small-cap growth stocks. I would now like to talk about the last type of stock that income investors should own in their portfolios, "intuition pick" dividend stocks. Intuition pick stocks are stocks that may have shaky fundamentals, but there is something about them that makes them appealing in the current economic setting. Maybe they produce a great product that is low margin but everyone uses. Perhaps they are providing a service that many people have come to view as essential. Maybe they are just on the cutting edge of what consumers are demanding.

Intuition picks are not about figuring out what is wrong with a stock but finding that piece of information that goes beyond sheer numbers and tells you that this stock is worth owning. Regardless of the headwinds that may be arise against a stock, intuition picks must be made with belief. These positions can be quickly sold to raise cash or to buy another stock that has risen in favor.

The reason you choose to invest in stocks like these may come down to a simple decision such as "I like their products." You do not necessarily have to have fundamental reasons to invest in these stocks. Just because you do not focus on the fundamentals does not mean you can ignore them either. You still have to consider the fundamentals when investing in these stocks. You do not want to plow money into a sinking ship just because your gut tells you too. It is already a given that since we are discussing these stocks from the view of an income portfolio that they must pay a dividend. When considering these types of stocks there are really three fundamental questions you should consider that should override your instinct.

  1. Is This Stocks Debt Level Manageable
  2. Is Revenue At Least Flat Or Growing
  3. Is The Short Ratio Low

Answering these questions will help us to steer clear of stocks that we should not trust.

Darden Restaurants Incorporated (DRI)

Profile

Darden Restaurants, Inc. owns and operates full service restaurants in the United States and Canada. It operates restaurants under the Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V's Prime Seafood, and Wildfish Seafood Grille brand names. Darden currently has a dividend yield of 4.2%.

YearNet IncomeEarnings Per Share
2011$478.7 Million$3.39
2012$476.5 Million$3.57

Headwinds

Everyone knows that the American consumer is getting squeezed more and more. Discretionary income has been falling for the last 4 years. This trend may take a while to turn around. One of the first things to suffer from falling discretionary income is the prepared food sector. These are a few of the headwinds this industry faces.

Fundamentals

  1. Is This Stocks Debt Level Manageable? DRI currently has outstanding debt totaling $2.93 billion with $61.4 million in cash reserves. This is a manageable level of debt considering it is less than one year's total revenue.
  2. Is Revenue At Least Flat Or Growing? DRI's revenue from 2008 totaled $6.63 billion and has grown to $8 billion ending 2012.
  3. Is The Short Ratio Low? The percentage of outstanding shares that are shorted currently stands at 2.8%.

Gut Instinct

Literally, my gut is guiding me on this one. For all the shortcomings that Red Lobster has on the larger Darden Brand, Olive Garden and more recently Longhorn has picked up the slack. I love both restaurants and visit them frequently. Longhorn has little competition is its market traditional steakhouses have lost favor recently. Olive Garden is the perfect restaurant if you want to be served a nice meal that will not break your wallet. The prepared food segment is hard to profit from but Darden has shown a ability to profit even when things are tight. I believe they will continue to do just that

Hershey Company (HSY)

Profile

The Hershey Company, together with its subsidiaries, engages in manufacturing, marketing, selling, and distributing various chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide. Hershey currently has a dividend yield of 2.1%.

YearNet IncomeEarnings Per Share
2011$628.96 Million$2.74
2012$660.93 Million$2.89

Headwinds

With the new healthcare laws and attacks on unhealthy eating habits in The United States Hershey is prime target for scrutiny. Chocolate is an easy culprit to blame for obesity and overweight children. These are a few of the headwinds this industry faces.

Fundamentals

  1. Is This Stocks Debt Level Manageable? HSY currently has outstanding debt totaling $1.91 billion with $728 million in cash reserves. This is a manageable level of debt considering it is less than one year's total revenue.
  2. Is Revenue At Least Flat Or Growing? HSY's revenue from 2008 totaled $5.13 billion and has grown to $6.64 billion ending 2012.
  3. Is The Short Ratio Low? The percentage of outstanding shares that are shorted currently stands at 4.0%.

Gut Instinct

With the attack on healthy eating in America, It is important that note the rest of the world's impact on this stock. As the world wealth continues grow little status symbols and treats such as chocolate will continue to draw focus. Hershey has a growing overseas market. Recently, Hershey has started producing healthier version of their chocolate, at least as healthy as you can make it and still have it taste good. These two important facts should help propel Hershey forward regardless of the roadblocks ahead of them.

Wells Fargo & Company (WFC)

Profile

Wells Fargo & Company provides retail, commercial, and corporate banking services. The company operates in three segments: Community Banking; Wholesale Banking; and Wealth, Brokerage, and Retirement. Wells Fargo currently has a dividend yield of 2.9%.

YearNet IncomeEarnings Per Share
2011$15.87 Billion$2.82
2012$18.9 Billion$3.36

Headwinds

Has there been any good publicity for banks over the last 5 years? People's view of banks has severely shifted from needing banks to despising them. It seems that every time you pick up a newspaper you hear of some new lawsuit regarding banks and the housing crisis. These are a few of the headwinds this industry faces.

Fundamentals

  1. Is This Stocks Debt Level Manageable? WFC currently has outstanding debt totaling $184.55 billion with $216 billion in cash reserves. This is a manageable level of debt when considering the banks cash on hand totals.
  2. Is Revenue At Least Flat Or Growing? WFC's revenue from 2008 totaled $34.9 billion and has grown to $48.39 billion ending 2012.
  3. Is The Short Ratio Low? The percentage of outstanding shares that are shorted currently stands at 1.2%.

Gut instinct

Let us face it. Banks are not going anywhere. Now its just a matter of picking which one. Wells Fargo emerged the healthiest bank of them all from the financial crisis. Wells now leads all banks in the United States in terms of mortgage origination. Wells has benefited from its buyout of Wachovia and has increased its market exposure on the east coast. This expansion as well as failures of many other banks has turned Wells into the industry leader in mortgages. Wells Fargo has shown time and time again that their leadership is capable of handling tenuous situations. If another crisis should arise I would put faith in its management team to handle the situation.

Walt Disney Company (DIS)

Profile

The Walt Disney Company operates as an entertainment company worldwide. Its Media Networks segment engages in broadcast television network, television production and distribution, television stations, broadcast radio networks and stations, and publishing and digital operations. Disney currently has a dividend yield of 1.4%

YearNet IncomeEarnings Per Share
2011$4.81 Billion$2.52
2012$5.68 Billion$3.13

Headwinds

I have heard many times over the last three years that the movie industry is dying. I keep reading that production budgets are swelling with new CGI technologies and these swollen budgets are cutting into profitability. On top of it Disney seems intent on buying every major production company out there. This alone is an expensive feat. These are a few of the headwinds this industry faces.

Fundamentals

  1. Is This Stocks Debt Level Manageable? DIS currently has outstanding debt totaling $14.6 billion with $3.39 billion in cash reserves. This is a manageable level of debt considering it is less than one year's total revenue.
  2. Is Revenue At Least Flat Or Growing? DIS's revenue from 2008 totaled $37.84 billion and has grown to $42.28 billion ending 2012.
  3. Is The Short Ratio Low? The percentage of outstanding shares that are shorted currently stands at 4.1%.

Gut Instinct

My gut tells me that before long Disney will be the biggest show in town. ESPN has already for the most part cornered the sports market and they have shown excellent foresight in the purchase of marvel and lucas arts. Their successes on the big screen recently with the Avengers and Iron Man have been nothing short of spectacular. Not to mention Disney is targeting the most important demographic there is, children. If you can capture a child's mind and make them a fan when they are young you will have a fan for life.

Exxon Mobil Corporation (XOM)

Profile

Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products.

YearNet IncomeEarnings Per Share
201141.06 Billion$8.42
201244.88 Billion$9.70

Headwinds

Green energy is the wave of the future. Oil is a dirty fuel that pollutes our atmosphere. It is responsible for global climate change. Big oil companies do not pay enough taxes. Need I go on? We have all heard the rhetoric spewed against oil companies. These are a few of the headwinds this industry faces.

Fundamentals

  1. Is This Stocks Debt Level Manageable? XOM currently has outstanding debt totaling $12.42 billion with $13.06 billion in cash reserves. This is a manageable level of debt considering the current debt amount is covered completely by the cash reserves.
  2. Is Revenue At Least Flat Or Growing? XOM's revenue from 2007 totaled $358 billion and has grown to $433 billion ending 2011.
  3. Is The Short Ratio Low? The percentage of outstanding shares that are shorted currently stands at 2.2%.

Gut Instinct

My gut tells me that oil companies are not going anywhere. Oil companies have become to much a necessity in our society for them to disappear. Now oil itself may be replaced. Green crude, bio-fuels, and renewable fuels are all making inroads into the current crude oil only market. Oil companies have the cash and infrastructure to profit from that shift as well. These products will still need to be mass produced, refined, and shipped. Integrated Oil Companies like XOM and CVX will profit regardless of what the commodity is or where it comes from. Ride oil all the way to the top and then some.

Summary

Stocks that you pick based on your instinct are the riskiest stocks that will exist in your income portfolio. Our feelings tell us to ignore certain information. To believe that a company will succeed in spite of certain roadblocks that may be looming. It is easy to be discouraged when picking these stocks. The returns may be sub-par compared to other stocks in your portfolio. Focus on the reason you believe they will succeed any time you being to doubt owning a stock. If your conviction for owning a stock ever waivers, than you should consider selling. This rule does not apply to stocks that we own based on fundamentals. Remember though these picks a lot of times go against fundamentals. Either you should take your profit or cut your losses and walk away. These stock picks are not for the faint at heart and should be the last element you seek to add to your income portfolio. Please post below and let me know what stocks you have picked based on your instincts.

Source: 5 'Intuition' Dividend Stocks For An Income Portfolio