Dividend stocks are gaining traction in today’s market because of the appallingly low yields available in traditional investment vehicles like Certificates of Deposit, Treasury Bills, etc. I am in no way implying that the safety of an investment in dividend stock is on a par with Certificates of Deposit or Treasury Bills. Any investor would agree that the degree of risk is greater with stock.
What I am suggesting, is a thorough analysis of a company’s historical performance, financial health and growth prospects, can result in a reasonably safe investment with the potential to offer you a greater yield. With risk, comes reward (we hope)!
I’ve selected these 5 stocks because the companies are well known, have a long history and are viewed as very successful in their respective markets. We’ll begin with:
The Dow Chemical Company (NYSE:DOW), father of the Dow Jones Industrial Average (NYSEARCA:DIA), is currently trading at a level approaching its 52 week low and now may be the time to buy. The company’s financial position hasn’t deteriorated. In fact, the firm recently retired $4 billion in debt which is expected to save $200 million in interest expense. I believe the stock is greatly undervalued. The book value of the stock stands at $17.09 per share against today’s trading price of $22.80. That means a price to book ratio of 1.26. Add to that a healthy dividend yield (currently 4.60%), and you have a winner in my book. In comparison, E.I. du Pont de Nemours and Co. (NYSE:DD), has a book value of $12.66 per share and a corresponding price to book ratio of 3.04, more than twice DOW’s. DD’s dividend yield is very good at 4.30%; however, it is clear to me that the greatest potential for dividend earnings, plus gains in share value, lay with DOW.
General Electric Co. (NYSE:GE) is our next target. GE is also a bit long in the tooth and like DOW, is near its 52 week low. Again, I believe now is the time to buy! GE has an enviable global presence and is favorably positioned to benefit from continued growth in its Asian markets. With a price to book ratio of 1.22 and an attractive dividend yield of 3.80% and I think you’ll agree it’s a winner. If we look at rival Siemens AG American Depository (SI), it too has a decent price to book ratio of 1.83 and a dividend yield of 4.30%. I favor GE however, as the price of admission is $14.86 per share compared to SI at $89.79 per share. The analysts seem to favor GE over SI as well, leaning more toward a “strong buy” for GE. The real clincher for me though is the projected earnings growth (.77) for GE which is almost 3 times that of SI (.26)!
Moving into the healthcare sector, let’s examine Pfizer, Inc. (NYSE:PFE). Here is yet another stock nearing its 52 week low. Of course, given what’s happening to the DJIA, that’s almost a given for any stock in the index, isn’t it? That said, PFE remains a good pick for several reasons. Recently PFE concluded clinical trials of Lyrica, its top selling anti-seizure drug. The trials established that Lyrica is an effective “stand-alone” treatment for partial-seizures, the most common type experienced by individuals with epilepsy. Outstanding news for PFE, as this drug represents $3 billion in annual sales! Beyond that, PFE, like the preceding stock we have analyzed, has a very favorable price to book (1.53), a strong dividend yield (4.50%), and projected earnings growth of 2.29. I concur with the majority analyst opinion. PFE is a sound buy.
Merck & Co., Inc. (NYSE:MRK), another giant in the sector, is worth a look as well. MRK recently prevailed in yet another lawsuit involving its anti-osteoporosis drug Fosamax. This is the fourth verdict in favor of MRK and could halt any momentum that may exist for a class-action suit. This dark cloud aside, MRK offers a good investment opportunity. It has a favorable price to book (1.75), a higher dividend yield (4.80%) than rival PFE, and a decent projected earnings growth (1.93). Although it isn’t the darling of analyst opinion (perhaps the litigation?), it is still averaging a “buy”. This recent triumph in Merck’s Fosamax battle puts the stock solidly on my “favorites” list.
Our final analysis brings us to Alcoa, Inc. (NYSE:AA) in the basic materials sector. Here, I believe we have the “poster boy” for the value stock but not an excellent dividend stock. Here’s why! Alcoa stock is trading at a fraction of book value (14.66) giving the stock a price to book of 0.61. The dividend yield (1.40%) is not so exciting and the projected earnings growth (.23) doesn’t blow anyone’s skirt up either. Alcoa has global reach but they are squaring off against China’s giant, Aluminum Corporation of China L (NYSE:ACH) based in one of Alcoa’s strongest potential markets. One could argue this is the perfect storm and bodes ill for Alcoa. But ACH doesn’t hold all the cards. Although China has large bauxite reserves, they are poor in quality. Moreover, energy costs are “through the roof” in China and this leaves the door of opportunity open for Alcoa in the Chinese market. All said and done, in this writer’s opinion, Alcoa is best viewed as a value stock, not a dividend stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.