I should probably begin by re-emphasizing that I believe in investing for the long term. I subscribe to Warren Buffett’s philosophy that you should buy a stock with a plan to hold onto it for 10 years or more. Any gains earned from short term trading tend to be eroded by higher taxes and commission fees.
With that disclaimer out of the way, it is helpful to look for stocks with potential catalysts that could push the stock higher in the coming months. It’s obviously much easier to look out over the next six months and evaluate which stocks could outperform the market versus picking the stock winners of 2016.
At the beginning of 2011 we did a similar exercise and identified our top five dividend stocks for 2011. That dividend portfolio has returned 10% YTD and has doubled the performance of the S&P 500 index.
Now we have identified six blue chip dividend stocks that we expect to outperform the Dow Jones index over the next six months. All six of these dividend stocks are currently Dow components and a couple of our stock picks will probably surprise you.
Boeing delivered blowout earnings for the first quarter – arguably the strongest earnings performance of any of the Dow stocks. Earnings came in at $.08 ahead of Wall Street’s estimates and yet the company elected to not increase their full year guidance. The aerospace stock is positioned for strong future quarters and will inevitably have to increase its 2011 guidance. Next year, revenue growth is expected to accelerate into the double digits and could be the beginning of what many believe is a multi-year buildout for Boeing.
Dividend Yield: 2.2%
General Electric (GE)
GE is a compelling turnaround story. GE Capital, which nearly sank the company in 2009, saw its loss provisions decline by 49% y/y in the first quarter. Maybe the biggest surprise was GE giving its third dividend increase in the past 12 months and which put their current yield back above 3%. Wall Street’s consensus price target for GE is currently $24, which leaves 25% potential upside in the stock.
Dividend Yield: 3.1%
Caterpillar stock has soared over 74% the last 12 months, but its run does not appear to be over yet. The company has been handily exceeding Wall Street’s earnings estimates of late and Caterpillar’s recent acquisitions could lead to additional upside in future quarters. Barring future economic setbacks, this appears to be another stock with nearly 25% potential upside.
Dividend Yield: 1.7%
Walt Disney (DIS)
Disney disappointed many investors with lackluster earnings results earlier this month. The stock sold off more than 5% following that earnings miss and now presents an attractive entry point for investors. Aside from a disappointing performance from Disney’s studio segment, the company is humming along nicely. I would expect Disney to be able to easily beat the lower earnings estimates for the next 2 quarters.
Dividend Yield: 1.0%
Alcoa is probably the first surprising name on this list. Alcoa’s dividend yield is still minimal following its 82% dividend cut back in early 2009. However, strong aluminum demand has Alcoa positioned to deliver stronger than expected earnings this year.
Dividend yield: 0.8%
JP Morgan (JPM)
JP Morgan is clearly the gold standard among bank stocks. The company came out of the recession in the best shape of any of its peers and just recently gave its investors a big dividend increase. Shareholders should also benefit from the company’s aggressive stock repurchases. JP Morgan has authorization to repurchase up to $8 billion in shares this year or nearly 5% of its current market cap.
Dividend yield: 2.4%
Bank of America (BAC)
Probably the biggest surprise on this list is Bank of America. The bank is still in poor shape and was not even allowed to raise its dividend. However, Bank of America is currently trading below its book value of $21 per share. By the end of 2011, many expect that Bank of America will have most of its mortgage issues behind it. That alone could be the catalyst to push this stock to $20 per share and undoubtedly a higher dividend.
Dividend yield: 0.4%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.