Retirees focused on generating yield from their savings have sought dividend-paying U.S. equities as short-term rates remain low. Investors have been treated to strong equity market returns in the first quarter of 2012. According to the Stock Trader's Almanac, history has indicated that U.S. markets do better in the six-month period from November through April. I'm taking the advantage of the ramp in equities to rotate out of lower quality equities into more defensive, low beta equities which I think will perform better if the markets continue to sell off.
- Market capitalization of greater than $10 billion
- Dividend yield of greater than 2.5%
- Beta of less than 1.0x
- Focused on large capitalization equities as they have scaled and durable business models. Large capitalization equities typically are not concentrated in terms of customers or products, thus reducing company-specific risks.
- Focused on dividends that are higher than the 10 year U.S. Treasury.
- S&P500 (SPY) has a beta of 1.0. Betas less than the market exhibit less volatility than the market.
Markets are showing signs of fatigue after weaker economic data as well as somewhat hawkish comments from the Federal Reserve about further needs for quantitative easing.
Retirees that are seeking yield and are long-term bullish on the markets should stick with high quality equities. With interest rates in the developed world at record lows and central bankers focused on fueling inflation, I am hesitant about holding long duration bonds despite their strong performance throughout the crisis.
Medtronic Inc. (MDT)
- Price to Earnings: 12.1x
- Dividend Yield: 2.6%
- Debt to EBITDA: 1.9x
- Market Capitalization: $39.2 billion
Rationale: MDT is the largest medical device manufacturer in the world. The Company holds nearly 50% share in the heart device market. Aging demographics in the developed world will benefit the Company.
Johnson & Johnson (JNJ)
- Price to Earnings: 17.7x
- Dividend Yield: 3.5%
- Debt to EBITDA: 1.0x
- Market Capitalization: $178.0 billion
Rationale: JNJ commands the #1 or #2 positions in the majority of its markets. The Company's business model is recession-resilient. Aging demographics and the increased spending on healthcare will benefit the Company.
Molson Coors Brewing Company (TAP)
- Price to Earnings: 11.5x
- Dividend Yield: 3.1%
- Debt to EBITDA: 2.9x
- Market Capitalization: $7.5 billion
Rationale: TAP is the 2nd largest brewer in Canada and the United States. While TAP operates in a low growth end market, the beer business is relatively stable. The Company's scale provides cost benefits over other competitors.
Waste Management, Inc. (WM)
- Price to Earnings: 16.9x
- Dividend Yield: 4.1%
- Debt to EBITDA: 3.0x
- Market Capitalization: $15.8 billion
Rationale: WM is a dominant player in the landfill and waste management business. The Company operates 300 landfills. WM operates a stable, annuity-like business and provides investors with a strong 4% dividend.
The Coca-Cola Company (KO)
- Price to Earnings: 20.0x
- Dividend Yield: 2.7%
- Debt to EBITDA: 2.4x
- Market Capitalization: $173.0 billion
Rationale: The Company operates a global brand with an unparalleled distribution network. Coke has strong growth opportunities in the emerging markets. The Company maintains a strong balance sheet and will provide investors with strong dividends for years to come.
Pfizer, Inc. (PFE)
- Price to Earnings: 20.1x
- Dividend Yield: 3.8%
- Debt to EBITDA: 1.4x
- Market Capitalization: $173.9 billion
Rationale: The Company has a strong pipeline of drugs and provides a strong dividend to shareholders. Pfizer will benefit from an aging global population that is seeking drugs to cure ailments. The Company's scale provides significant economies of scale. PFE has a strong balance sheet to support the development or acquisition of new drugs.
Annaly Capital Management (NLY)
- Price to Book: 1.0X
- Leverage: 5.8x
- Dividend Yield: 13.5%
- Market Capitalization: $15.8 billion
Rationale: NLY is the largest agency mortgage real estate investment trust (REIT). NLY provides investors with a strong hedge against ultra-low interest rate policy. I think that yield focused investors should build a diversified portfolio of REITs with a portfolio of their portfolio.