By Joel Obaseki
Investors have different and unique strategies. Some like to trade stocks daily and profit from market volatility, while others may seek mid-cap firms and profit from medium to long term earnings growth. Personally, I prefer dividend-paying stocks and the cash flows they provide. I believe market conditions are perfect for investors to take refuge in these dividend yielding companies. Though there are risks involved, there is substantial upside potential as the five stocks I identify in this article are undervalued, while the market is currently overvalued. The five companies below are strong American brands, which have withstood the test of time and also pay investors a reliable dividend.
Coca Cola (KO) is the world's most valuable brand. The company went public in 1962 and currently has a market share of the soft drink market on every continent in the world. The company has a paid a dividend each year since it went public. Today, annual dividend payments of $1.88 a share equals a current yield of 2.8%. Coca Cola provides investors with stability, as the company has a beta of .49. Its business model of cheap sugary drinks bodes well in up and down markets. Coca Cola is also heavily invested in Latin America, Africa, Asia and Europe, which provides further stability and growth for investors.
For three years McDonald's (MCD) reported stagnant same restaurant growth in the U.S., however the company is anticipated to report sales growth of 9% and higher. Despite previous stagnant growth, McDonald's did not cut its dividend and has managed to make a payout for 38 consecutive years. McDonald's is the premier global fast food brand that has replicated its highly efficient business model across its thousands of restaurants globally. By effectively using its economies of scale and use of cheaper products, the company has successfully earned investors additional profit from each burger sold. McDonald's' current dividend is $2.80 per year, implying a 2.8% yield.
McDonald's has also outperformed its closest competitor Yum! Brands across the board, including revenue and earnings growth. The introduction of a healthier menu and beverage (coffee) products enables the company to increase its market and grow domestically.
Wal-Mart (WMT) is the largest retailer in the world; not only does it compete with U.S. retailers such as The Kroger Company (KR) and Target Corporation (TGT) in the grocery and durable goods business, it also competes with global brands such as Britain's Tesco and France's Carrefour S.A., the number two and number three global retailers. Despite the size of Wal-Mart, which has a market cap of $208 billion and has stores in North America, Europe, Latin America, Asia and as of recent, Africa; the company is growing. Revenue has grown an average of 8% each quarter on a year over year basis.
In addition to its global expansion, Wal-Mart is very bullish on its e-commerce business segment and recently hired Neil Ashe, former CEO of CNET Networks to head their global e-commerce department. Currently Wal-Mart is the 6th largest internet retailer, which provides endless opportunity of growth. In addition to the growth aspects; investors should be long Wal-Mart due to its impressive and consistent dividend yield of 2.5% ($1.46 per year) and the relative cheapness of its stock. Shares are currently trading at a P/E multiple, which is substantially less and cheaper than its industry average of 22.
Johnson & Johnson (JNJ) pays the highest dividend of the five companies listed, as shares are providing investors with a dividend yield of 3.5% and the company has a long history of paying dividends to its investors. The company manufactures and sells consumers staples; products which have had a permanent fixture in home medicine cabinets across America, brands such as Tylenol, Sudafed, Listerine, Splenda and many others. Moreover, the company produces medical devices, diagnostic tools, and everything from medicines used to treat HIV/AIDs patients, to bipolar disorder and schizophrenia.
The diverse product lines and the demand for each make Johnston and Johnston the perfect long term investment. Although Johnson and Johnson does not specialize in low value products, the company still fares well in down economies. As per volatility, the company has a beta of .55 due to necessity of its products. The dividend is $2.28 per year, implying a yield of 3.5%.
PepsiCo (PEP) is Coca Cola's largest competitor. Both companies compete to provide soft drinks to consumers globally. However, PepsiCo is not a one-trick pony as the company has a snack food empire which includes Lays (Walker's in Europe), Doritos, Quakers food, Cheetos, Ruffles and many other brands. In "I want a larger share of your stomach", CEO Indra Nooyi explains how the company plans to expand its business and sell healthier, less salty and sugary products to capture a greater share of the market.
Combined with Pepsi's recent performance, the company is a potentially great investment for investors. Revenue and profits have consistently gown each year at a 13% and 4% rate, respectively, and both are anticipated to end fiscal year 2011 in the same manner. During the first three quarters of 2011, revenues have increased on average each quarter on a year over year basis, earnings have grown at a rate of 4% throughout the same period. Its forward annual dividend of $2.06 (3.1%) represents a 50% payout ratio. In my opinion, the dividend is healthy and should continue to see growth in line with earnings.
Each of the companies listed above are great dividend paying companies with long histories of making consecutive payments, moreover the growth outlook for each company is promising.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
