In early January of both 2010 and 2011, I described portfolios containing seven dividend paying stocks each, that I considered worthy of holding for the entire year.
My 2010 “buy and hold” portfolio averaged a 21% return for the year compared to 13% for the overall market, at least as measured by the S&P 500 (all returns include stock price changes plus dividends received). Even better, six of my seven picks recorded gains for the year.
Looking at my portfolio for 2011, my seven stocks returned 24% on average, vs. breakeven for the S&P 500. Again, six of my seven picks ended the year in the positive column. Driving the portfolio’s outperformance were B&G Foods (BGS), up 83%, and McDonald’s (MCD), up 34%. DuPont (DD), down 5% for the year, was the only loser.
Now, I’m pushing my luck and describing a new list of seven stocks for 2012.
This Year's List
Once again, the list contains only dividend paying stocks. Why? Considering the continuing global economic uncertainties, you can’t count on a strong stock market in 2012.
Unlike most stocks where you only make money if you can them sell for a profit, dividend stocks pay you just for holding them. If the market drops, you still get paid while you wait for it to recover. As the 2010 and 2011 results illustrate, besides for the steady dividends, you still have the potential to enjoy serious share price appreciation.
Of course, it’s not that easy. During a market downturn, dividend stocks go down as well. Thus, you must be prepared to hold your stocks until the market recovers. Further, you must pick solid companies with strong business prospects that will survive whatever the economy throws at them. Here is this year’s list.
American Software (AMSWA): Makes software used by manufacturers and distributors to manage back-office operations. Its software manages supply chain (materials coming from suppliers), purchasing, warehouse, and transportation (outbound) activities. American suffered through several years of lackluster performance. However, sales picked up markedly in 2011. For instance, October quarter sales rose 22% vs. year-ago. American’s current expected dividend yield (next 12-months dividends divided by current share price) is 3.8%.
Golar LNG (GLNG): Until a few years ago, natural gas could only be transported using pipelines. Recently, however, techniques have been developed to convert gas to a liquid, transport the liquid by ship, and then convert it back to gas at its destination. New drilling techniques have created a surplus of natural gas in the U.S., leading to a vibrant and rapidly growing export market. Golar owns and operates ships that liquefy natural gas for transportation at its departure port, other ships for transporting the liquefied gas, and still other ships for converting the liquefied gas back to natural gas at its destination port. Golar is paying a 2.7% dividend yield.
H.J. Heinz (HNZ): Makes ketchup, condiments, sauces, frozen foods, soups, beans and pasta meals, infant food, and many other packaged food products. In North America, Heinz is a slow grower, but overseas, Heinz is experiencing relatively strong sales growth. Yield 3.6%.
OneBeacon Insurance Group (OB): Because the market is so competitive, normally, insurance is not an attractive sector for investing. However, in 2006, OneBeacon, a relatively small player, changed its strategy from offering general property & casualty insurance to specialized insurance for niche markets such as oil and gas producers, car collectors, healthcare providers, and the like. OneBeacon is generating strong growth in those niche markets. However, since it is still in the process of selling off its general property and casualty business, OneBeacon’s current financial reports are not reflecting its growth potential. Yield 5.6%.
Oneok (OKE): Although nominally a natural gas utility serving Kansas, Oklahoma and Texas, Oneok owns the controlling interest in Oneok Partners, which is a major player in the gathering, processing, storage and transportation of natural gas. In fact, most of Oneok’s profits already comes from Oneok Partners, which, because natural gas is replacing coal and crude oil wherever feasible, is a fast growing business.
Vanguard Total Bond Market Index (BND): An exchange-traded-fund (ETF) that tracks an index representing a large variety of medium-term government, government sponsored, and corporate bonds. Although subject to interest and inflation risk, investment quality bonds generally do well when stock prices dip. Thus, Vanguard will serve as a counterbalance to the stocks making up the rest of the portfolio. Yield 3.2%.
Verizon Communications (VZ): The only repeat from last year’s portfolio. Besides for its wireline business, serving customers in 24 states and D.C., Verizon owns 55% of Verizon Wireless (Vodaphone owns the balance). In the past, Verizon Wireless and AT&T were more or less equal competitors. However, last month, Verizon Wireless inked deals with major cable TV companies that will make Verizon Wireless the dominant provider in the U.S. Yield 5.2%.
Past performance doesn’t predict the future. Thus, my 2010 and 2011 success doesn’t mean that this list will be profitable in 2012. Do your own research. The more you know about your stocks, the better your results.