As we head intoearnings season , investors have ample reason
for both optimism and caution.
The U.S.economy appears to be getting healthier, as seen by
the recent monthly employment report. Yetstocks , after a
stunning four-year rebound, appear to already anticipate a great
deal of solid economic growth yet to come.
Will the economy come through? It's too soon to know. We are
not yet at a level of self-sustaining growth that leadseconomists
to declare with certainty that 2014 and 2015 will represent
steady and strong growth.
That's why I continue to suggest a focus on stocks with
defensive characteristics. They are still capable of solidupside
if the economy expands at a healthy pace. Yet they have
valuations in place that will help them hold their ground if the
economy (andstock market ) stumbles in the months ahead.
A key measure of safety isfree cash flow yield , which is a
company's free cash flow (operatingcash flow minuscapital
spending), divided by a company'smarket value . Many companies in
the S&P 400 (mid-caps), S&P 500 (large caps ) and S&P
600 (small caps) sport free cash flow yields in the 3% to 6%
range. Yet fewer than 100 out of these 1,500 sport free cash flow
yields in excess of 10%.
While on the subject of yield, investors like to see a hefty
amount of that free cash flow paid back to shareholders in the
form of dividends. I screen for stocks that sport both
double-digit free cash flow yields along withdividend yields
above 4%. (I recently discussed the importance of that 4%
These aren't the kinds of stocks that are bound to outperform
the pack in a surgingbull market , but theyoffer a solid
combination of decent upside, good yields and, most
importantly,downside protection. (Those solid yields would rise
higher if the stock price falls, attracting a new round of
Many of these stocks are electric utilities and telecom
service providers, which are expected to check off these boxes
interms of the paired yields. Here's a look at the eight stocks
that sport solid free cash flow yields and dividend yields.
The first thing to check for is the difference between these
two figures: The free cash flow yield should always be higher. If
not, the free cash flow is insufficient tosupport the current
Second, you need to assess the long-term sustainability of
thebusiness model . For example,
Pitney Bowes (
R.R. Donnelly (Nasdaq: RRD)
both live in a paper-based world at a time when the world is
A pair of stocks in this group holds appeal.
CalamosAsset Management (Nasdaq: CLMS)
is remarkably inexpensive in the context of its free cash flow,
which I discussed a few months ago.
Investors may also want to check out automobile insurer
Safety Insurance (Nasdaq: SAFT)
, which has managed risk quite well, generating positive free
cash flow for at least the past 10 years. Moreover, this insurer
has hiked its dividend at least 10% in seven of the past eight
years, boosting the payout from 44 cents a share to
Risks to Consider:
Risingbond yields are taking some of the luster off
dividend-paying stocks, but any pullback in the share prices of
these dividend payers could represent great entry points, as long
as the rate rebound in fixedincome remains manageable.
Action to Take -->
An ever-rising market has left investors with few certifiable
bargains. If you think it's time to pivot away from growth and
toward value, then these solid yielders hold great