In today's financial markets, people approach investing with a specific set of goals in mind that normally fall into two categories: capital preservation or capital appreciation. For those who want to build wealth in the market through capital appreciation, stocks that have high growth prospects or superb management would be the asset of choice. For those who are looking to keep what wealth they already have, stocks with steady businesses and high yields would be where they would find what they need. However, situations can sometimes arise where a company can fill both roles, with dividends that satisfy a defensive investor along with business plans that attract more aggressive buyers. Below is a potential portfolio of 4 stocks that fit this description - companies that allow you to play both defense and offense with your money:
|Stock||Yield||5 Yr Annual Div. Growth|
|Dow Chemical (NYSE:DOW)||2.5%||29%|
|Occidental Petroleum (NYSE:OXY)||3.1%||24%|
Chevron is a diversified energy company that engages in the exploration and production of oil and natural gas around the world. The company expands through its upstream operations by acquiring reserves of natural resources, then, through its downstream operations, refines and transports the resources to its customers. Chevron's business performance is tied to the price of the resources it looks to acquire, mainly the price of crude oil and natural gas. The more resources Chevron produces and refines, the more the company can expand.
As of 2013, Chevron had oil production rates of close to 2.6 million barrels per day, with 75% of this production coming from outside the United States. This shows that Chevron's international presence shields its business from economic surprises in a specific country or region. The company currently has a number of exploration projects under way, including two liquefied natural gas (LNG) developments in Australia and three deepwater oil fields in the Gulf of Mexico. When completed, these new projects are expected to increase Chevron's production to 3.1 million barrels of oil per day by 2017, a 19% increase over current levels. What's more, the company is planning to open 75 new exploration projects through the year 2014. With an average drilling success rate of 59% when exploring, the year's planned operations are expected to yield material results to Chevron's bottom line over the long term. This increased production has required Chevron to pick up its hiring in 2013 and 2014-2,608 employees were hired last year, versus only 753 in 2012. These developments mean that Chevron's growth prospects remain strong for the coming years as it stays competitive in the international energy market.
While investors wait for this growth to materialize, they will be rewarded with a management team devoted to returning cash to shareholders in the form of dividends and share buybacks. Chevron currently sports a 3.4% yield, and has consistently raised their payout from year to year. In fact, 2013 marked the 26th consecutive year of dividend raises, with an annual raise of 11% since 2004. This extremely strong track record should bring comfort to defensive investors who are looking for yield protection and growth. Future payout growth also looks strong, as Chevron currently pays only 35% of its earnings out as dividends. This means that even if Chevron doesn't grow their earnings, they would still be able to double their dividend and have cash left to allocate to their business activities. Investors should feel very confident in the safety and future growth of Chevron's dividend to buoy their stock and to complement the appreciation of the company's shares.
Dow Chemical is a chemical manufacturer and supplier for the agricultural and consumer market. The company develops products that aim to address many international challenges, including clean water and energy generation, food production, and power conservation. In 2013, Dow had 53,000 employees on its payroll and total sales of over $57 billion. The company reported earnings before the opening bell on April 23, and impressed investors with an 11% earnings beat versus Wall Street expectations, even though revenues were slightly softer than projected. Management talked about many positive business shifts that are benefiting operations, including margin expansion across all segments and increasing demand for agricultural and construction products. They expect 2014 growth to surpass that of 2013, which shows increased confidence in their outlook for the United States and their other international markets going forward. The tone of the conference call was not that of a struggling business looking to stay relevant, but a company that has a strong footing in its industry and is ready to take advantage of increased economic activity.
Dow Chemical has several new products coming out that are verifying this confidence, including new photovoltaic films used in their solar panel units. The new films provide more efficient electricity performance and increased stability when converting sunlight into usable power. Another positive development for the company involves the opening of a new chlor-alkali facility in a joint venture with Mitsui & Co. This facility produces chemicals used in feedstock for a variety of industrial and agricultural markets. With this new production now online, Dow can more fully capitalize on the secular international trend of an increasing world population, which leads to a higher demand for food.
Apart from Dow Chemical's growth initiatives, the company boasts a strong and sustainable dividend to appease more defensive minded investors. DOW currently pays out an annual dividend of $1.48, which comes out to a 3% yield at current prices. The company is a serial dividend raiser, with average annual dividend growth of over 29%. This should impress anyone looking for a strong dividend stock to augment their capital gains, because if this trend continues, Dow Chemical's stock would yield close to 4% by the end of next year. This payout growth also comes with safety - Dow currently distributes 37% of its earnings as dividends, which shows the company can easily grow its dividend even with no earnings growth. The key factors of both organic business growth and a safe and strong yield don't appear often, which should impress investors looking for a safe yet expanding business.
BlackRock is the world's largest asset manager, with over $4.4 trillion - yes, trillion with a T - under management worldwide. The company earns its money mainly through fees and commissions generated from both its passively and actively managed funds. BlackRock owns the iShares portfolio of ETFs, which provides a large variety of baskets and strategies clients can choose from to fit their investment goals. The company has recently observed a shift into the fund's fixed income ETFs, and has capitalized on this trend with an expanded set of products to attract investors. This has garnered BlackRock the largest share of the fixed income ETF market, with Q1 inflows alone coming in at $2.5 billion. When the company reported strong earnings on April 17, they highlighted this fixed income shift, as well as other developments that are contributing to their success. Margins moved up by 140 basis points to 41.4%, and both operating income and revenues jumped around 10% due to increased mutual fund flow. Management took this increased fund traffic to mean that the retail investor is, slowly but surely, coming back to the financial markets. This trend benefits BlackRock tremendously, because when more people put their money with BlackRock's high quality fund products, the more the company takes in through fees and commissions. This trend should keep BlackRock in a stable position as the world's number 1 asset manager for many years to come.
Along with the strong quarterly numbers on April 17, the company announced a 15% dividend increase to its current distribution. This brings BlackRock's dividend yield up to 2.5% on an annual basis. While the payout doesn't impress the defensive investor at first, the value of the dividend lies in its steady and consistent growth. BlackRock has a current payout ratio of 40% of earnings, meaning the company could double the dividend solely with the cash it receives on a regular basis. A potential doubling of the dividend, while highly unlikely, shows the true financial power of the company. BLK would sport a 5% yield if the dividend were to double, which would surely attract the dividend investor then. Combine this with the impressive growth the company is experiencing, and one can start to see the true potential value of the shares in the future. BlackRock has consistently raised their dividend by close to 30% every year since 2009, and has the financial position and the earnings power to continue this trend for the foreseeable future. With both a strong business plan ready to take advantage of secular trends and a safe dividend to fall back on, investors should consider BlackRock as a serious addition to their portfolio.
Occidental Petroleum is an energy and chemical power company engaging in the exploration and sale of oil and natural gas, as well as the manufacturing and sale of basic chemicals and vinyls used in energy products. The company's main operations are located in the continental United States as well as South America, Africa, and many parts of the Middle East. In an effort to scale down its operations to refocus on its core strategic businesses, Oxy has been spinning off and selling many of its assets around the world, including $8 billion worth of Middle East assets as well as $1.4 billion worth of assets in the central United States. In addition to these activities, Occidental is in the process of splitting up by around the end of 2014 into two separate companies. Its assets in California will become a new entity and remain the state's largest natural gas producer, while Oxy looks to move its headquarters to Houston to stay closer to its more lucrative Permain Basin operations. This split-up, amid a corporate overhaul following involvement by activists, should unlock value in Occidental's shares as its operations expand and its new influx of cash is used effectively.
Apart from its significant restructuring, Occidental provides current investors with a steady stream of income to stay faithful during the changes. OXY's dividend yield at today's prices comes in at 3.1%, which acts as a cushion for the stock should any sudden action with the company's operations or management cause volatility. What's more, investors have been rewarded over the long term with a consistent increase in the payout of over 23% annually over the past five years. This steady track record should give investors confidence when thinking about future sources of income. Looking forward for Occidental's situation can give investors confidence as well, with plenty of financial leeway for the company to continue to raise distributions in the future. OXY currently pays out just 35% of its earnings as dividends, which means significant raises in the future aren't going to put pressure on the company to raise debt or other capital in order to pay it. If earnings continue to expand, the dividend has even more safety over the long term to be raised and kept safe. When both aggressive and defensive minded investors look at this name, they should both find aspects that could warrant a bid.
As investors gain experience in the market over time, it can be hard to stay focused on the fundamental principles of stock picking that lead to long term success. If people can keep a specific goal in mind when looking at companies, such as protecting or growing their wealth, they can maximize their potential for achieving their goals. There are some stocks, however, that can fill many roles in a portfolio, and I believe the stocks listed above do just that. A portfolio invested equally in each of these four names would provide a yield of around 3%, which is more than a 10-year Treasury bond can offer. When looking at each individual name, catalysts remain that can spark significant growth in the coming months and years. The financial position of all these companies is strong enough to deal with sudden economic changes as well as rewarding shareholders for their confidence in the business. With more research and a fair picture of value, investors can buy into these names and feel confident in their growth prospects as well as their durability over the long term.
Disclosure: I am long BLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.