Future Buying Opportunity In Dividend Stocks

Includes: KO, MO, PEP, PG, WMT
by: Matt Cilderman

While I was writing the section about Coca-Cola (KO) in my previous article, I began to have ideas for this new article. So, my thesis may sound a little familiar.

I realize that this is a bit of a generalization, but a large number of Dividend Investors have stocks from the Consumer Staples sector as core holdings in their portfolio. Some of these stocks include Procter & Gamble (PG), Coca-Cola , Wal-Mart (WMT), Altria (MO), and PepsiCo (PEP).

Every smart investor likes a sale, and I believe that we may be presented with better buying opportunities in the second-half of the year and beyond. Below, I will briefly explain three possible scenarios that could bring about the buying opportunity that I am waiting for.

Scenario 1 - Continued Recovery/Equity Markets Rise

The Financial Times Alphaville Blog had a great piece on what happens after bond yields rise as they have been (it should be noted that I am attributing the increase in bond yields to a change in sentiment, a shift from safety to risk).

Healthcare and consumer staples are the main casualties. We have examined eight periods of rising bond yields since 1980 and consumer staples generally underperformed.

The research also shows that when bond yields rise in this way, the Consumer Staples sector tends to underperform for the next year.

Scenario 2- Poor Earnings

All of the companies mentioned (PG, KO, WMT, MO, PEP) get a large portion of revenue from outside the U.S. (except MO) and are looking to China to fuel a portion of their growth. The slowdown in China and the fact that Europe may already be in recession, should have a negative effect on earnings. As we have seen recently, this could cause an over-reaction as "jumpy" investors look to lock in gains from the autumn 2011 lows.

Scenario 3 - History Doesn't Repeat...But it Could Rhyme with Last Time

Ed Yardeni has a great chart (below) showing how the markets have reacted to the various forms of quantitative easing by the Federal Reserve. The chart also clearly illustrates what happens when the spigot is turned off. Currently, Operation Twist is slated to run through June 2012.

Just in case you are wondering, this is a chart of how the selected consumer staples stocks fared from May, 2011 to the end of January, 2012 (note: PG is in red).

Click to enlarge


While I think there is a good chance that one of these scenarios will occur, and am saving my money for then, I am always looking for a good bargain and will seize the chance if it presents itself.

Contrarian Scenario

It has been said that with the upcoming election in the U.S. and change of leadership in China, there is no way the markets will be allowed to pull back. The theory here is that both governments with undertake various forms of stimulus (QE-3, etc.) and open the spigots further. While I could certainly be accused of wearing a tinfoil hat, I see this as a possibility.

Disclosure: I am long KO, PG, PEP.