Volatility has spiked recently in conjunction with a resurgence of Europe's sovereign debt issues. The focus this time is Spain and Italy. Call me a skeptic, but it feels like the current Eurozone crisis was used as an excuse to take profits prior to earnings season. I never bought in to the theory that the Eurozone would crater in the first place. Nonetheless, I am sensing a shift in the markets from "Risk On" to "Risk Off". My "Risk Off" strategy is to reallocate certain funds into large cap blue chip dividend paying safe haven stocks with low betas and high yields.
Dividend Investing Approach
My dividend investing approach is based on constructing a portfolio of highly rated stocks with exceptional dividend yields that generate money throughout the year. Characteristically, dividend investing is popular among retirees and those who wish to live on their savings and are no longer able to work. One reason to invest in dividend-paying stocks now is due to the fact they will be the investment of choice to fund the retirement of many baby boomers, which will create enormous demand for these stocks.
Dividend-paying stocks have the potential for both capital gain and income production. Boomers will be looking for stocks that have a track record of increasing dividends, giving them yet another hedge against inflation. This combination will be necessary to fund the lengthening retirement that comes with a greater life expectancy. Combining these factors with the Fed's announcement that rates will remain at low levels for at least the next couple of years, we can see that fixed income instruments such as bonds and CDs provide little protection against inflation. Factor this in with the fact that historically, dividend-paying stocks have outperformed non-dividend-paying stocks, and you have a recipe for outstanding returns.
Low Beta Dividend Safe Haven Stocks
A blue chip is a stock in a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. Blue-chip stocks are generally the leaders in their industry. Moreover, most of the following stocks are trading below consensus analysts' estimates, have recent upgrades, positive analyst comments and dividend yields of over 3% and betas of less than 1. Please review the following briefs regarding the five blue chip stocks that made the cut.
Chevron Corporation (CVX)
Chevron just released its first quarter 2012 interim update, covering the first 2 months of the quarter. On the whole, the update is bullish, with earnings expected to be higher than the previous quarter. Chevron has a beta of .77 and a dividend yield of 3.21%. With a forward PE of 7.40 and a price to book ratio of 1.65, Chevron looks undervalued. Chevron has dropped nearly 10% since reaching a Q1 high of just over $110 per share. Chevron is now trading near its 200 day moving average of $101. This is the ideal time to start a position. Chevron has significant potential upside. With a mean consensus estimated price target of 16 analysts of $125 and a current share price of $101, Citigroup has 26.4% upside potential.
Procter & Gamble Co. (PG)
Procter & Gamble has products that touch most people's daily lives whether they know it or not. Procter & Gamble has increased distributions by 10.90% per year over the past decade. Procter & Gamble has a beta of .44 and a dividend yield of 3.16%. With a forward PE of 15.42 and a price to book ratio of 2.85, Procter & Gamble looks fairly valued. Procter & Gamble has dropped slightly since reaching a Q1 high of just over $68 per share. Procter & Gamble is now trading near its 50 day moving average of $66. I would wait for another five per cent pull back prior to starting a position. Procter & Gamble has significant potential upside. With a mean consensus estimated price target of 18 analysts of $74 and a current share price of $66.4, Procter & Gamble has 11.5% upside potential.
AT&T, Inc. (T)
AT&T is one of the most widely held stocks today. AT&T is currently trading at its 50 day sma. Reviewing the chart, you can see this is the point of resistance the stock has rebounded from making it an opportune entry point. AT&T has a beta of .60 and a dividend yield of 5.78%. With a forward PE of 12 and a price to book ratio of 1.71, AT&T looks undervalued. AT&T has dropped slightly since reaching a Q1 high of $31.50 per share. AT&T is now trading near its 50 day moving average of $30.50. With a mean consensus estimated price target of 28 analysts of $32 and a current share price of $30.5, AT&T has minimal upside potential.
Johnson & Johnson (JNJ)
Johnson & Johnson is one of the most widely held stocks today. JNJ is currently trading near its 200 day sma which has been a significant point of resistance. The company has a beta of .53and a dividend yield of 3.56%. With a forward PE of 11.79 and a price to book ratio of 3, JNJ looks fairly valued. JNJ has dropped slightly since reaching a Q1 high of over $66 per share. With a mean consensus estimated price target by 16 analysts of $70.50 and a current share price of $64, AT&T has 10% upside potential.
Pfizer Inc. (PFE)
Pfizer is currently trading in a well-defined uptrend. Moreover, it is current resting near the bottom of the trend channel which is an ideal time to start a position. The company has a beta of .72 and a dividend yield of 4%. With a forward PE of 9.34 and a price to book ratio of 2, PFE looks undervalued. PFE has dropped slightly in recent days but is still only 3% below its 52 week high. With a mean consensus estimated price target by 17 analysts of $25 and a current share price of $22, PFE has 13.6% upside potential.
The sell in May and go away phenomenon has been in effect for the last two years. With the massive run the market has incurred over the first quarter, I believe the May sell off is even more likely. Some hedge funds have already reached their year-end performance targets. They could sell out and take the rest of the year off. It is only prudent to adjust a portion of your portfolio to low beta, high dividend blue chip safe haven stocks. I think the market will fluctuate based on earnings results then sell off in May. These stocks hold up well in downturns and you get paid while you wait.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses.