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It’s been over six months since I penned my Best in Breed Dividend Stock series for Seeking Alpha. For the majority of that time, the markets have been on an unsustainable trend upwards. I have refrained from writing individual analyses as I simply did not trust the multiples being awarded to equities. I couldn’t bring myself to recommend stocks at such lofty levels. Lucky for us, there was the end of July and first week of August …

SPX
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Pardon me while I chuckle.

How did you not see this coming? Let’s break down just some of market headwinds we have seen over the last two months; the end of QE2, lingering effects of the Japanese earthquake and tsunami, a growing European sovereign debt crisis, and increasingly negative U.S. economic data points. Just how bad were those U.S data points? How about a Q1 GDP revision down to .4% and Q2 GDP coming in at whopping 1.3%? Let’s not forget the July ISM number plummeting to 50.9%, its lowest reading since August of 2009. Sprinkle in some truly dreadful employment numbers and you have a surefire recipe for disaster. Anyone who is blaming this on the debt ceiling debate is fooling themselves. There’s a reason companies are sitting on oodles of cash and not hiring. There’s a reason why companies have been conservative with their Q3 guidance. The world’s economy is slowing down. We need to accept this as fact and allocate capital accordingly.

So with all that doom and gloom how can I possibly recommend investing in equities? Look, things are bad, but the world is not ending. Even if we slip into another recession, the S&P doesn’t need to trade down to 900. Companies are still making money and equities are the only investment with any chance of generating alpha. This correction has brought stocks back to reality. I still don’t think stocks are cheap but at these levels I am willing to put some money to work.

First, I want to turn to companies that have been beaten down in the correction that have rock solid balance sheets and pay safe, secure and growing dividends. I’m still a sucker for yield.

Consumer Staples:

Procter and Gamble Co. (NYSE:PG)

Current Yield: 3.50%

Procter and Gamble is the world’s largest producer of household items by revenue. Its core brands include Pampers, Charmin, Gillette, Crest, Duracell, Tide, Iams and Pringles, among many others. These products carry a strong brand recognition that provides a wide competitive moat between P&G and its competition.

Procter and Gamble is part of the elite Dividend Champion club increasing its dividend an astounding 55 years straight. Its average dividend growth rate over the last 7 years is nearly 12% with a sustainable dividend payout ratio of 41.4%. Procter and Gamble’s current yield of 3.5% is nearly 40 basis points higher than the 10 year U.S. Treasury.

But there is much more to love about Procter and Gamble then its products and yield. Let’s dive into the fundamentals:

PG OVER
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ROE in the last seven years is 26.6% over double the equity average. Likewise, the sustainable growth rate is 15.6% comfortably above the 10% I look for in investments. Procter and Gamble is currently trading at a P/E of 15.9, which is two points below its seven-year average.

If we model Procter and Gamble’s future earnings using its sustainable growth rate of 15.6% (more info on SGR here) we arrive at a suitable and safe return for investor’s capital:

PG SGR
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Bottom line:

Proctor and Gamble has traded down on the threat of rising input costs and the growth of private label products. I don’t view the rising cost of commodities as long term threat to P&G’s business model. Inflation is either transient or will be passed onto the consumer. The threat of private label brands will subside as the economy recovers. Fundamentally, Procter and Gamble is attractively valued with a forward PE ratio of just over 14. This Best of Breed name carries an attractive 3.5% yield with a strong sustainable business model. If you are looking for a safe investment with strong potential for growth, Proctor and Gamble is worth taking a look at.

Technology:

Intel Corp (NASDAQ:INTC)

Current Yield: 4.0%

Intel Corporation designs, manufactures, and sells integrated circuits forcomputingand communications industries worldwide. It offers microprocessor products used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds.

With every passing quarter the fundamentals behind Intel get stronger and stronger and the stock gets cheaper and cheaper. This is usually not a good sign. In Intel’s case, I believe this is simply a market overreaction to Intel’s uninspiring exposure to the mobile and tablet market. I have full confidence that this world class company will be able to penetrate this market with its upcoming Atom processors and it Wi-Max 4g network.

Intel has increased its dividend payments for eight straight years. Its dividend growth rate during that time frame is 34.3% with a payout ratio of 37%. With Intel’s recent weakness it is yielding a whopping 4.0% slightly below the 30 Year U.S. Treasury.

Let’s take a look at just how cheap Intel has gotten:


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That right, Intel is currently trading at a PE of 9.5, significantly below the market average. Furthermore, at a PE of 9.5 Intel is trading at less than half of its historical average of 21. With a five year expected PEG of .79 this stock is severely undervalued.

The low valuations skew Intel’s ROE and SGR. Even with this noise Intel still sports a respectable 16.6% ROE. If we model future earnings using Intel’s SGR rate of 10.5% we come to a compelling case for the company:


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Bottom Line:

Eventually Intel’s multiples will return to the mean. When this occurs all of these numbers will be revised upward. The best part of this investment is you are paid a 4% yield until the market comes to its senses. The market is slowly taking this company to the woodshed. It’s not a buggy whip. This is the leader in the industry with a solid competitive moat.

Technology:

International Business Machines (NYSE:IBM)

Current Yield: 1.7%

International Business Machines Corporation was incorporated in the State of New York on June 16, 1911, as the Computing-Tabulating-Recording Co. (C-T-R), a consolidation of the Computing Scale Co. of America, the Tabulating Machine Co. and The International Time Recording Co. of New York. Since that time, IBM has focused on the intersection of business insight and technological invention, and its operations and aims have been international in nature. This was signaled over 80 years ago, in 1924, when C-T-R changed its name to International Business Machines Corporation. And it continues today: The Company creates business value for clients and solves business problems through integrated solutions that leverage information technology and deep knowledge of business processes. IBM solutions typically create value by reducing a client's operational costs or by enabling new capabilities that generate revenue. These solutions draw from an industry leading portfolio of consulting, delivery and implementation services, enterprise software, systems and financing.

In my last article on International Business Machines Corporation, I pounded the table at $162 a share. Since that time IBM has spiked to $185 on a fantastic earnings release and traded down with the market to its recent close of $172.98. Even at this level IBM is a screaming buy.

IBM has increased its dividend payments for 16 consecutive years. Its dividend growth rate during that time frame is 21.8% with a payout ratio of 18.5%. With a current yield of 1.7% and a payout ratio of 18.5% one can expect rapid increases to follow.

But no one is buying IBM simply for the yield. Take a look at the fundamentals of the company, some of the strongest of any large cap company I follow:


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To a value investor, these numbers are staggering. IBM’s seven year average ROW is an astounding 45.6%. Additionally, the SGR rate is 37.1%. You get all of this for a slight premium to the market averages.

Now let’s model future earnings using IBM’s sustainable growth rate:


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Bottom Line:

That’s a conservative projected return of over 33.8%. This company is firing on all cylinders (for a more detailed account of IBM check out my original analysis on the company here.) IBM might be subject to some profit taking if the market falters more. However, on any market stabilization this name is going to $200 in short order.

Again, as I finish this article, Futures are down over 230 points. It’s time to start nibbling, just don’t get carried away,

Disclosure: I am long PG, INTC.

Source: 20 Year Millionaire: Time to Pick 'Em