High Yield Blue Chips Set to Rally?

The recent sell off in treasuries has given clues to the fact that money is moving from "safe" treasuries to risky investments, such as stocks, as the market continues to gain ground with clarity on the US coming out of the recession later this year. The breakdown of the VIX at 35 was a sign of stablization and fear was coming out of the markets, allowing this rally to have legs.

I came across the action in the Barclays High Yield Fund (JNK) Monday and noticed that it had broken past triple resistance and had done so on consecutive days of unusually strong volume. The fact that money is going into High Yield funds further supports the notion that an economic turnaround is underway and the worst is behind us.

Companies such as Community Health (CYH), DirecTV (DTV), Citi (C), Aes (AES), GMAC, MetroPCS (PCS), and Windstream (WIN) are some of the larger components offering high yield securities in this fund.

The main risk in investing in high yield securities is that the underlying company goes bankrupt or operations slowdown to the point that loan covenants are broken, and interest payments are not able to be made. The amount of money flowing into this fund is also showing the belief that credit markets are thawing and lending is easing.

With a record amount of cash still on the sidelines, waiting to put money to work in the equity market, subtle signs such as the action in the Barclays High Yield Fund are signals that we are not going to test the lows, and downside in the markets is now clearly limited, while the upside could provide an opportunity of a lifetime for long term investors looking for "comeback" stocks.

This rally is not just a bear market rally, and although recent data suggests that "junk" stocks have led the rally, there are many signs that blue chips are ready to take this market higher, since investors are willing to put money to work in high yield "risky" assets, I am sure that the abundance of blue chip stocks yielding 6% or more dividends will be the next group to lead a market rally, especially considering that most dividend cuts and restructuring actions have taken place already.

A screen for blue chip stocks yielding 6% or more, with a forward P/E less than 15, and Debt/Equity < 1 include:

• AstraZeneca (AZN) 7.86%
• BCE Inc (BCE) 6.35%
• Bank of Montreal (BMO) 6.38%
• Bristol Myers (BMY) 6.11%
• British Petro (BP) 7.15%
• Boardwalk Pipeline (BWP) 9.01%
• CenturyTel (CTL) 9.04%
• Duke Energy (DUK) 6.42%
• Enbridge (EEP) 10.63%
• Alliant Energy (LNT) 6.18%
• Merk (MRK) 6.23%
• NuStar (NS) 8.01%
• Telecom of New Zealand (NZT) 7.84%
• Reynolds (RAI) 8.51%
• SK Telecom (SKM) 8.51%
• AT&T (T) 6.47%
• Indonesia Telecom (TLK) 9.59%

Disclosure: No Holdings in These Names

Comments

[L S:]

I'd argue that this article may have been great a month ago. Is it too late now? I think it's very dependant upon the company. BP for example, still sports a hefty dividend. But it's price has already come up nearly 40% from it's low in early March (up from ~$33 to ~$47). That being said, I still think BP is a great buy even at $47, and I added heavily to my position when it was at $38. Far too many companies have slashed their dividend, so do your research. Who would have thought, for example, that Dow Chemical, after nearly 100 years of holding or increasing their dividend, would have to cut it by nearly 2/3 in 2009? It appears BP will be able to maintain their dividend, unless the price of oil unexpectently craters.

I didn't see any of these articles being written when the Dow was at 6500. Everyone's just going with the flavor of the day, which lately is extremely bullish. I'm still a big fan of the Buffett mantra of being greedy when everyone else is fearful. A big buy-in at 6500 would have paid off handsomely.

May 12 09:32 AM

[31October:]

"The fact that money is going into High Yield funds further supports the notion that an economic turnaround is underway and the worst is behind us."

Only when there have been consecutive months of *positive* job growth, then an economic turnaround is underway.

BP is in a technical rally, just like JNK or C. There are dozens of articles about demand destruction for crude & n.gas. I am long BP, CNK.PR.E, DXO, and GMXRP -- I bought BEFORE the rally. They are good investments, but it is better to buy shares on sale. I am slowly moving into cash and will buy more BP if it goes back under 42. Until oil consumption is up and reserves move down, their upside is limited.

May 12 10:31 AM

[Whippet:]

Funny- I bought JNK for opposite reasons. It's paying me 16% and appreciating as long as the rally continues; I have trailing stops to dump it when it craps out. And it will crap out. I suspect there is a lot of short term traffic in the high yield markets that will be dumped when either a) the floor drops out of the Treasury bubble or b) the market tests its 666 lows.

May 12 11:26 AM

[Joe Kunkle:]

I realize the article may have been somewhat better a few months ago, but that is not really the point....the point is that the next group of stocks that will see money flow is Blue Chips.

I trade an options only portfolio, and have returned 357% this year, swing and day trading options, with around 500 trades already this year.

May 12 11:33 AM

[Joe Kunkle:]

I would also add that many of the names are Telecom and Pharma, which have severely lagged the recent rally and thus are not over extended.

May 12 11:35 AM

[Living4Divi...:]

Nice article, Joe ! Because I am interested in safe dividend yields, I am glad you posted the list. I just wanted to put out that on some of the foreign ADRs, the posted dividend yields are INCORRECT.

I am just curious, where did you get your data?

May 22 08:41 AM

[Joe Kunkle:]

Apologies for any incorrect numbers..get my data from FinViz

May 22 11:54 AM

[Living4Divi...:]

Thanks! (I still think, you wrote a terrific article)

On May 22 11:54 AM Joe Kunkle wrote:

> Apologies for any incorrect numbers..get my data from FinViz

May 22 12:01 PM

[jsampson:]

BP has stated that they would go into debt before they cut their dividend!

May 24 06:49 AM

[jsampson:]

CEO, Of DOW-Liveris well for awhile I thought he may he broght the company to its knee's but he is actually doing big things and must say he is starting to impress me at this point and am a buyer.

May 24 06:51 AM