The European debt crisis has been an ongoing threat to the market for many months, and now a slowing economy in China and the U.S. is adding to market stress. If that wasn't enough, the "Fiscal Cliff" is
looming as we get closer to the end of the year. If Congress and the President don't find a solution, automatic budget cuts will kick in, along with tax increases, which could create a very big blow to this already fragile economy.
Investors are in a tough spot because staying in cash or money market type accounts will pay almost nothing, and yet the stock market can be too volatile at times. This means the best strategy for many investors is to stick with what has been working, and that means select dividend stocks. Investors are desperate for relatively stable stocks that pay a dividend because the low interest rate environment is not going away anytime soon. Companies that have strong balance sheets, and stable business models appeal to investors now, especially when dividends are involved. These types of stocks have been outperforming the stock market and this trend is likely to continue in the second half of 2012. Here are a few stocks that look cheap and could be poised to generate both income and capital gains for investors:
Wellpoint, Inc. (WLP) shares were trading above $70 in June, but then the Supreme Court announced that Obamacare was constitutional and the stock plunged to around $60. Investors are concerned that this provider of health insurance benefit plans will be forced to cover consumers who, under Obamacare, will be able to get insurance coverage even with pre-existing conditions. A consumer could just opt to have no insurance and if they get major health problems, they could go to a company like Wellpoint and demand to be covered. The plan as proposed, will allow consumers to get away with this by paying a relatively small penalty. This is a very flawed system and the market is right to be concerned; however, there is still a good chance that Obamacare will be repealed (especially if Obama loses the upcoming election) or at least modified. Also, Wellpoint could see more customers, which could help offset some of the higher expenses that could be coming, if Obamacare is not repealed. This company has a strong balance sheet with about $19.3 billion in cash and around $10.7 billion in debt. The stock appears undervalued at just around 8 times earnings, especially when you consider it pays a solid dividend that is likely to grow in the future. During the first quarter of 2012, Wellpoint repurchased about 10.2 million shares of its common stock for $679.8 million and it is authorized to buy about $3.7 billion more over time.
Here are some key points for WLP:
Current share price: $61.62
The 52 week range is $56.61 to $75.69
Earnings estimates for 2012: $7.77 per share
Earnings estimates for 2013: $8.51 per share
Annual dividend: $1.15 per share which yields 1.8%
American Capital Agency Corp. (NASDAQ:AGNC) shares have been a great investment this year. Investors have benefited from a very strong dividend yield plus capital gains, since the stock has been in an uptrend. This company is set up as a real estate investment trust, and this requires it to payout most of its earnings in the form of a dividend to shareholders. American Capital borrows money and uses this leverage to amplify the returns it earns by investing in mortgage-backed securities. Since this stock pays a yield of over 14%, it is very appealing in a low interest rate world. Investor demand should remain strong for this stock and it is likely to keep offering returns that outperform most other investments. Analysts at Zacks Investment Research recently added this stock to their #1 strong buy list. The dividend appears safe and sustainable and that makes the stock look cheap as it yields over 14%.
Here are some key points for AGNC:
Current share price: $34.60
The 52 week range is $22.03 to $35.18
Earnings estimates for 2012: $5.47
Earnings estimates for 2013: $5.47
Annual dividend: $5 per share which yields about 14.4%
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) shares have been punished in the past several weeks, dropping from about $38 in May to just below $33 today. Investors have been concerned that weakening demand for copper from major buyers like China would impact this company negatively. Also, gold has not been performing as well as many investors had expected, given the concerns for a financial crisis meltdown coming from Europe and the chance of more easing from the Federal Reserve. However, this stock might now be at an inflection point, since growing signs of weakness could push the Federal Reserve into more easing. Investors tend to seek hard assets like gold when central banks ease and print money. Also, easy money often boosts demand for housing and increased construction means more copper demand. That is why Freeport is particularly well-positioned to benefit from easing. Furthermore, China just recently acknowledged the slowdown in their economy and they have begun to ease by lowering rates. This could lead to a sharp rebound in the price of copper and gold, and Freeport might be best positioned to benefit. This cheap stock pays a generous dividend that yields almost 4%, which makes the shares worth buying and holding for a rebound.
Here are some key points for FCX:
Current share price: $31.92
The 52 week range is $28.85 to $56.78
Earnings estimates for 2012: $3.73 per share
Earnings estimates for 2013: $4.93 per share
Annual dividend: $1.25 per share which yields 3.8%
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.