We just endured a recession that was the worst since the
GreatDepression . Since the recession ended, the economic recovery
has been weak to say the least. Forecasts for economic growth in
2011 and 2012 are hardly awe inspiring.
While anything can happen and the stock market has cyclical bounces
and dips at any time along the way, it is only reasonable to seek
out investments that have performed well under similar economic
circumstances -- times of tepid economic growth. Let's take a look
back…
In the economic malaise of 1974 through 1982,GDP growth averaged an
anemic +2% per year. During this period, the S&P's price return
was an annualized +4.14% -- but total return for this period, which
also included dividends, averaged +9.39% per year. That means
dividends accounted for most of the market's total return.
History suggests that it might be a good time to take a look at
some reliabledividend paying stocks. Special attention should be
paid to those companies that pay secure dividends in good times and
bad as well as stocks that the market recovery has neglected.
AT&T (NYSE:
T
)
This more-than 100-year old company is one of the largest
telecommunications providers in the world. The company is the
second largest wireless provider in the country, the dominant local
phone company in 22 states, and a wireless services provider in
more than 220 countries.
Major telecom companies today generally offer steady
cash flow
but limited growth. A major growth driver in the wireless industry
has been data services (Internet access from phones and other
mobile devices). AT&T has been far outgrowing rival
Verizon (NYSE:
VZ
)
in this area, primarily because AT&T has had exclusive rights
to offer
Apple's (Nasdaq:
AAPL
)
iPhone. But, it is widely expected that AT&T will lose
exclusivity early next year.
Investors in AT&T have largely dismissed solid recent results
in anticipation of lower future results next year. But I think this
fear has been overemphasized. While results will likely slip
somewhat, the company has plenty of room to grow data services, as
43% of its wireless customers still don't use them. As well,
AT&T has been adding subscribers at a solid pace apart from the
iPhone, and other phones are becoming increasingly competitive.
The stock pays quarterly dividends, which at the current rate of
$0.42 per share, translates to $1.68 a year for a stellaryield of
nearly 6.0%. The company has raised thedividend every year since
1998. Thedividend is also rock solid: In the first nine months of
2010, the telecom giant generated
free cash flow
of $11.6 billion and paid out $7.4 billion in dividends. In the
past six quarters, the company had more than $9 billion in free
cash flow left over after dividends.
Eli Lilly and Company (NYSE:
LLY
)
Founded in 1876, Eli Lilly is one of the largest pharmaceutical
companies in the world. The company makes top drugs in a variety of
areas, including antidepressant drug Prozac and neurological drug
Zyprexa. Its products are sold in 143 countries and the company
generated about $22 billion in revenue for 2009.
Like most big pharma companies, Lilly faces significant patent
expirations in the next several years. But the company's patent
expirations are particularly steep even for the industry, as drugs
representing about 40% of sales will lose patent protection between
2011 and 2013.
However, the looming expirations are factored into the price
already and the company has taken significant steps to develop new
sources of revenue. The company acquired biotech giant Imclone in
2008 and has been investing heavily in its internal pipeline of new
drugs. Meanwhile, the stock currently sells for less than eight
timesearnings , compared with an industry average of 13.
Lilly pays quarterly dividends of $0.49, which translates to a
generous 5.7%yield based on recent prices. Thedividend has nearly
doubled in the past decade and is still well supported with a
payout ratio
of less than 50% of
net income
.
Consolidated Edison (NYSE:
ED
)
Con Ed is the primary electric utility in southeastern New York
(including New York City) and also operates in New Jersey and
Pennsylvania. The company provides electricity (more than three
quarters of revenue), steam and natural gas. It is one of the
nation's oldest utilities, and about 80% of revenue is generated in
its regulated segment.
The company has a well-entrenched and difficult-to-duplicate
infrastructure in a high demand area and should continue to deliver
solid results. Con Ed is in the process of updating and expanding
its systems, for which it has been granted a rate increase, and
should boost future revenue.
The stock has outperformed both Morningstar's regulated utilities
group and the S&P 500 in every measurable period for the past
fifteen years, averaging total annual returns of +7% for the past
10 years, compared with less than +1% for the S&P. But the
stock still sells for 14 timesearnings compared with the industry
average of 22.
As for thedividend , the company pays a current rate of $2.38 a
year per share, which translates to a well-above industry
averageyield of nearly 5.0%. Thedividend should grow, too,
considering the utility has raised it every year for the past 36
years.
Action to Take -->
All three of these companies are reasonably valued, operate in
defensive industries and have securedividends with growth
potential. The current market may be ideal for stocks with these
characteristics and all can be purchased at current prices.
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-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS
constructing investment portfolios. Tom's background includes a
NASD Series 7 and 63 certifications. Read more...
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.