Turnaround Candidates That Pay While You Wait

The U.S. stock market has been in a holding pattern of sorts, awaiting the Federal Reserve Board's decision about whether or not to raise short-term interest rates. By tomorrow, we'll likely hear the announcement of their decision to boost rates by 25 basis points (0.25 percentage points). The move has been telegraphed so effectively, it would be almost dangerous for the Fed not to move at this point -- that's how much the world expects the hike.

Investors probably will take the much-predicted news calmly, though it's possible that some higher-yielding stocks fall on the news. That's because some money will be shifted toward money market and short-term fixed-income instruments, which will become relatively more attractive as yields rise.

The short-term selloff could represent an opportunity to snatch up shares of high-quality, dividend-paying stocks that take a hit on the news. To improve my odds, I'll be focusing on stocks that are already somewhat unloved, for short-term reasons that won't matter much in the long run.

Here are two such candidates to consider for both capital appreciation and income:

Emerson Electric (NYSE: EMR ) is one of the most diversified electrical-equipment conglomerates in the United States, a $25-billion global manufacturing leader that focuses on industrial process management, automation, climate control, network support, power technology, motors and construction and maintenance tools. The company sells its products in more than 150 countries and has 220 manufacturing facilities around the globe.

Emerson endured a perfect storm of bad news in 2015. The oil and gas sector's weakness hurt sales of Emerson's process management products, which include equipment and control mechanisms used at various stages of the energy exploration, production and transport process. Weakness in the economies of China and other emerging markets led to a sales decline for Emerson's infrastructure products and systems. And the strong dollar made Emerson's products more expensive overseas, hurting international sales across the board.

Emerson's management warned that the first quarter of fiscal 2016 (ending December) will remain weak, but they are optimistic for a rebound in the rest of the year, especially compared with the weak 2015. Emerson should be helped by increased demand from a rebounding oil and gas sector as well as rising demand for electrical equipment needed in the renewable energy space resulting from the recent Paris climate change agreement.

Emerson yields 4.2% today and has increased its dividend for an astounding 59 years in a row. There's no reason not to expect that streak to continue. The company generates strong cash flow, and in addition to dividend hikes is expected to aggressively buy back its own shares as a way of compensating investors for its subpar 2015.

At recent prices, Emerson trades at 14.6 times analysts' consensus estimate for 2016 earnings per share and nearly 30% below its 52-week high. Buy this one, stash it away until the inevitable rebound and enjoy the hefty dividend yield in the meantime.

Wells Fargo (NYSE: WFC ) weathered the financial crisis better than most of its peers. It's now one of the largest banks in the nation, #3 in total deposits and #1 in market capitalization. Its balanced, diversified portfolio includes retail banking, consumer lending and a brokerage and retirement division but largely avoids investment banking and the too-big-to-fail issues that continue to cast a shadow over larger competitors.

Based in San Francisco, Wells Fargo has 70 million U.S. customers, more than 8,700 branches and more than 1,350 advisors and operates in all 50 states. It's a market-share leader, ranking #1 in commercial real estate loans, mortgage originations and small business loans and is #2 in auto loans. Wells Fargo's fast-growing brokerage business is now #3 by some measures. About half of the bank's income comes from interest, with the other half from fees -- an admirable breakdown that limits interest-rate risk.

Wells Fargo's performance of late has been better than its peers, ranking tops in deposit growth and loan growth in 2015. However, the stock took a hit this week when Wells' corporate loan chief warned that its loans to the energy industry were "stressed" due to that sector's ongoing struggle with historically low oil and gas prices. While certainly worth watching, Wells' energy portfolio is not large enough to cause huge damage to the company's otherwise well-capitalized balance sheet.

At recent prices, Wells Fargo yields 2.8% and trades at 12.8 times analysts' consensus estimate for 2016 earnings per share. If you lack financial exposure, this is a good time to add shares of one of the highest-quality banking stocks.

Risks To Consider: Emerson remains exposed to both energy and China, two areas of vulnerability -- but also opportunity, if they perform better than expected. Wells Fargo is vulnerable to a prolonged energy industry recession, increased regulation of financial stocks as well as weaker-than-expected economic growth in the United States.

Action To Take: Buy Emerson Electric below $46 and Wells Fargo below $54.

Editor's Note: In the past decade, these elite -- yet under-the-radar -- stocks have side-stepped vicious market corrections... raised dividends a combined 151 times... and returned more than 300% on average. Today these Hall of Famers boast an average yield of 7.4% , and you can get all of their names by accessing this exclusive new report .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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