Here is a list of four stocks that offer industry diversification, above average income, and the potential for capital gains. Combined, these four stocks make up our model growth and income portfolio. We evaluated each company on dividend sustainability and the potential for future growth. If you’re in the market for growth and income, take a look at these four stocks.
Intel (INTC) offers a yield 3.2%, the smallest of our four stocks. We feel that despite the modest payout, Intel offers the best opportunity for capital gains in our growth and income portfolio. The chip company has a rich tradition of profitability. In 2008, Intel was able to remain in the black, when most of its rivals lost money for its shareholders. Today, Intel boasts profit margins of almost 30% and is making the right investments in R&D to drive future growth. The recent increase in its dividend of 15% is one more reason that we believe the company understands the importance of providing an income stream to its shareholders.
Conoco Phillips (COP) gives investors a 3.5% yield in the highly profitable energy industry. Last year, the oil giant generated $187 billion in revenues, which equates to a 0.57 price to sales ratio, and has a price to book ratio of 1.5x. We believe that these metrics make a strong case that the stock is extremely undervalued, especially compared to some of its peers. Future growth should come from increases in refining margins, cost cutting efforts, and new exploration finds. The recent 20% increase in its dividend lets us know that management is committed in this area. It is important to note that the stock price does occasionally fluctuate due to the price of oil and other geo-political concerns, making it at times somewhat of a roller coaster.
Verizon (VZ) is the leading cell phone carrier (wireless) with a market share of just over 31%. Even though Verizon and AT&T (T) offer similar yields of 5.2% and 5.4%, respectively, we think Verizon has better growth prospects going forward. It is our opinion that Verizon will be able to increase subscribers at a faster than previous pace as customers flock to the new 4G network.
Another reason we favor Verizon is because of the recent addition of the iPhone to its portfolio of smart phones. We expect the erosion of AT&T’s wireless subscriber base to continue at a greater pace, once Verizon offers simultaneous voice and data services.
Verizon has been also been nipping at Comcast’s (CMCSA) feet in the cable and internet marketplace (wire). FiOS subscribership increased 5% in both areas of the wired services in the first quarter of this year. Verizon offers very modest dividend increases of around four cents annually or 2.7%. Verizon’s relatively high P/E of 30 and earnings per share, which is less than its dividend payout per share, gives us reason for caution -- even though the company does generate more than enough free cash to pay their dividend.
Eli Lilly (LLY) has the smallest market cap of the four companies listed in our portfolio. Lilly’s drug pipeline and current portfolio of drugs that includes a respected line of diabetes drugs makes it quite attractive to us. Along with several lucrative partnerships, Lilly manufactures Humalog, a blockbuster insulin that is a key drug in combating the war on diabetes. Diabetes is expected to be a trillion-dollar industry by the end of the decade. Lilly’s price to sales and price to earnings are some of the lowest in the industry at 1.79 and 8.5, respectively. Lilly's last dividend increase was in February 2009, so we wouldn't be all that surprised to see it raise another penny per quarter by the end of the year.
An equal-weighted portfolio in these four stocks would diversify one's holding and would average out to a:
- 4.28% yield
- $93.5 billion market cap
- 14.7 Price to Earnings Ratio
While no investment is perfect, we like the risk-reward dynamics here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.