The year ahead will likely be a challenging one for the stock market. Congressional budget issues will make government spending impossible to predict, and this creates uncertainty in the market. From my understanding, the only thing worse for the stock market than tanking earnings reports is uncertainty. To this point, corporate earnings have held up remarkably well despite the challenging global economy, but long term, responsible fiscal policy and clear guidance from the federal government is required to direct corporate spending. During uncertain times, corporations put off spending and hiring due to the uncertainty regarding fiscal policy. Guidance from Congress will enable organizations to plan effectively to mitigate the risks associated with the financial challenges ahead.
I have written previously about why dividend growth investing is a great strategy for uncertain times, and I will reiterate it here. Fluctuations in the market will influence the day-to-day trading price of stocks, but does not directly impact the underlying value of the company. A great company is a great company regardless of the current stock price. In addition, the uncertainty in the market creates buying opportunities for dividend growth investor, so they can purchase stocks at lower cost basis. In addition to low cost basis, flat trading enables DGI investors to reinvest dividends, which in time compounds incoming dividends. Purchasing dividend stocks, and reinvesting dividends allows investors to build an income stream they can rely on, despite the turbulent market conditions. While I expect a great deal of fluctuation in the markets over the months ahead, I view the weeks and months ahead as great buying opportunities for long-term investments in some great dividend stocks. Below you will find some initial analysis of some of the dividend stocks I will be watching, along with some of my rationalization for why these stocks are worth watching.
I wrote previously on why I believe defense contractors are a good long-term buy, despite the fiscal challenges and reductions in federal spending. Of the defense contractors available I believe RTN is the best long-term buy. Trading at just under $54 a share, TTM P/E ratio is below 9.6x versus the five-year average of 11x. The company pays out less than 35% of earnings as dividends and has a five-year CAGR of 14.4%. Over the past year, the company paid out $2.00 in dividends, which equates to a yield near 3.7%. With exposure to defense and other civil-side projects, I look to RTN as a great long-term investment, and one that I will watch closely over the month ahead to find a great entry. I wrote before that I would consider $52/share, but believe opportunities to buy-in below that price may present themselves as well.
Phillip Morris (PM)
Phillip Morris is one of my favorite dividend stocks, and I watch closely for great buying opportunities year round. PM represents one of the rare significant yield and high growth dividend stocks available. PM manufactures, distributes, and sells tobacco products outside the U.S. Despite the challenges facing tobacco sales, through regulation and restriction, PM has managed to grow sales and earnings over the past years. Trading at $89.99, PM sports a 17.4x TTM P/E ratio. This represents a slight premium to the five-year average P/E of 15, but with expected earnings growth of 10% over the next five years, a premium is deserved. PM pays out roughly 60% of earnings through dividends, and has grown the dividend from $0.46/quarter in 2008 to the current $0.85/quarter. At the current price PM pays a 3.78% dividend that appears to be sustainable with room for growth in the years ahead. Tobacco sales will continue to be pressured, but buying opportunities for PM near $85 could prove too good to pass up.
General Electric (GE)
General Electric is an industrial conglomerate that works on and produces seemingly everything. GE is one of my favorite stocks, and one I have covered extensively (here and here). The company has diverse business operations, arranged among industries like energy, healthcare, finance and transportation, all of which fall under the umbrella of General Electric. At the current price of $23.29, GE is priced a little too high for me to buy in, but I will watch closely for opportunities to add to my current position. At the current price, GE sports a TTM P/E of 16.7 a slight premium to the five-year average of 14.2. Earnings growth over the long term is project at an annualized 11% rate, and continued strengthening of GE Capital and the financial sector as a whole leaves me confident that GE Capital will continue to contribute positively to earnings in the time ahead. With the renewed focus on industrials, and recent sale of GE's stake in NBC Universal, GE appears focused on its core business and prepared to capitalize on high growth/high margin opportunities to boost earnings. The current dividend of $0.19/quarter represents a 3.26% yield on 50% of GE's earnings. With growing earnings and strengthening financials GE looks like a strong long-term investment.
Dividend stocks are great investments, particularly in turbulent times. I foresee roughness and challenges for the market in the months ahead, and am using this as an opportunity to build positions in key dividend stocks. The stocks mentioned here are not a complete listing of great dividend stocks, but rather a starting point for individual research to identify the right investments for every individual.
Disclosure: I am long GE.