Here we are in the last month of the third quarter of what has been a volatile year so far for markets. The good news is that despite the volatility, equity markets have performed well YTD. The bad news is that the volatility is not likely to go away anytime soon, mainly due to the uncertain macro environment.
In such a scenario, investors need to focus on preserving capital. Indeed, Return of Capital has replaced the old maxim of Return on Capital. Most investors therefore turn to the safety of Treasuries and Certificates of Deposits. However, in doing so, they are giving up returns offered by risk assets.
So how do you find the right balance between preserving capital and earning a decent return? You do that by investing in large cap stocks that have high dividend yields.
Now, I am not saying that volatility and uncertainty do not affect large caps. They do; only, these are huge companies, with a diversified business, which means they have the ability to mitigate risk. More importantly, the ones I am focusing on also pay regular dividends. So, even if there is no capital appreciation, you are assured of some return.
I have picked three such large cap stocks that are paying decent dividends this year. All three are from different sectors. Two of the picks have even outperformed the S&P 500 YTD. Here they are:
General Electric Co. (GE)
GE is currently paying a dividend yield of 3.32%. YTD, GE shares have gained 14.51%, outperforming the S&P 500.
GE is an obvious choice because of the company's diversified operations in terms of products and services, as well as geography.
In the second quarter of 2012, GE had reported operating earnings of $0.38 per share, up 12% on a year-over-year basis. GE's total revenue for the quarter rose 2% to $36.5 billion. The growth in GE's Industrial Segment was an impressive 9%, with organic growth at 10%. GE Capital also posted strong performance, which enabled it to return $3 billion dividend to the parent.
GE's financial results indicate that the company has been able to execute on its strategy despite the macro environment.
GE CEO Jeff Immelt said during the second-quarter conference call that the company's Industrial outlook remains positive. Immelt said that he is confident in the company's double-digit earnings per share growth expectations for 2012.
Verizon Communications (VZ)
At 4.58%, VZ has one of the highest dividend yields among large cap stocks. VZ has gained 8.92% YTD, which is lower than the broad market.
VZ's operating and financial performance in the second quarter of 2012 was impressive, with Verizon Wireless leading the way.
VZ reported total operating revenue of $28.6 billion in the second quarter of 2012, which represents an increase of 3.7% over the same period in 2011. The company's consolidated operating income for the quarter rose to $5.7 billion from $4.9 billion reported in the same period in the previous year. More importantly, VZ's free cash flow more than doubled in the first half of 2012 compared to the first half of 2011.
In the second quarter, Verizon Wireless' postpaid ARPU grew 3.7% to a record $56.13. Wireless operating income margin stood at 30.8% in the second quarter.
Verizon Wireless added 1.2 million retail net customers in the second quarter, including 888,000 retail postpaid net customers. Meanwhile, retail postpaid churn was 0.84%, which is the lowest in four years.
According to CEO Lowell McAdam, VZ is on track to meet its financial objectives and produce solid double-digit earnings growth for the year.
Merck & Co. Inc. (MRK)
The Whitehouse Station, New Jersey-based global healthcare company, is currently paying a dividend yield of 3.88%. MRK shares have gained 14.75% YTD, outperforming the S&P 500.
MRK has seen a significant progress in its product pipeline this year. MRK believes that its focus on innovation and execution will drive long-term shareholder value.
In the second quarter of 2012, MRK's worldwide sales were $12.3 billion, up 1%. Excluding the impact of exchange-rate fluctuations, MRK's worldwide sales rose 5% in the second quarter.
MRK's Pharmaceutical sales rose 2% to $10.6 billion in the quarter, with sales from emerging markets accounting for around 18% of pharmaceutical sales. China continues to be a major driver of growth in the emerging markets.
CEO Kenneth C. Frazier said during the second-quarter conference call that the company achieved top- and bottom-line growth by advancing its core strategy and maintaining momentum across businesses.
MRK forecasts full-year non-GAAP earnings to be between $3.75 per share and $3.85 per share. Revenue for the full year is expected to be at or near 2011 levels, excluding the impact of foreign exchange.