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15 dividend stocks for a big-cap comeback
Small caps have trounced big caps for the last five years. But next year, theres a strong possibility the winners will be big stocks with nice, safe dividends.
By Jon D. Markman
With the speculative fever for the shares of small companies like Travelzoo (TZOO, news, msgs) and Sirius Satellite Radio (SIRI, news, msgs) capturing the public imagination these days, it would seem a lousy time to consider anything but more of the same.
But the market gods work their magic in cycles, and very often the most popular group of stocks in one phase of the economic cycle is surpassed in a new calendar year by another that had grown pass.
In that vein, it may be time to go out on a limb and consider the possibility that the shares of dividend-paying large companies could be surprising leaders in 2005. That would be a shocker of sorts, as small-cap stocks have trounced their bigger brothers in the past five years straight:
| David beats Goliath | | S&P small caps vs. the S&P 500 | | | | Year | S&P Smallcap Index change | S&P 500 change | | 2004* | 18.0% | 6.8% | | 2003 | 37.0% | 26.0% | | 2002 | -15.0% | -23.0% | | 2001 | 6.0% | -13.0% | | 2000 | 11.0% | -10.0% | | | |
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*Through Dec. 10, 2004
Thats a great record, to be sure. But the markets partiality toward size is very streaky. In the six consecutive years before 2000, big caps trounced small caps. By late 1999, the little fellas were widely dismissed as inconsequential by the majority of investors -- just as big caps are now.
Smaller domestic stocks tend to do well during global slowdowns like the one the world experienced at the start of this decade because they do not rely on overseas sales for their income. Why would a small Minnesota-based barbecue restaurant chain like Famous Daves of America (DAVE, news, msgs) care about lousy consumer confidence in Germany if all of its rib-eaters are in the United States? Daves shares have advanced 490% since 2000, a span that has seen the S&P 500 ($INX) sink 20%.
But when economic conditions improve, larger companies start pulling their own weight -- using their greater financial resources to out-market smaller companies, consolidate industries, drive up prices and extend their reach farther overseas. Also at times like today, the decline in the dollar helps large companies disproportionately as it makes their products more competitively priced in foreign lands.
The strong allure of dividend stocks
And, finally, of course, there is the D-word. Thats D as in dividends. Last year, the Bush administration managed to cajole Congress into passing the most significant tax-reform legislation in more than a decade, trimming taxes on common stock dividends to the lowest level in decades -- 5% for taxpayers in the 15% bracket or lower and 15% for taxpayers in the 25% bracket or higher.
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That made sense, as dividends are simply corporate earnings distributed to shareholders -- and they were already taxed once at the corporate level. But the market mostly yawned in 2004, failing to push up the prices of dividend payers much.
Several contrarian-minded analysts, including Jason Trennert at ISI Group in New York, believe it could be a much different story in 2005. They point out that dividends have supplied as much as half of all stock-market returns in the past 100 years, and dividends provide the most powerful and vivid statement of the quality of a companys earnings. In his new book, New Markets, New Strategies," Trennert quotes Babson College finance professor Michael Goldstein as saying, Dividends are good because they remind the CEO four times a year that its not his company.
As small companies shares run into the end of the year on euphoria reminiscent of 1999, they are, as a group, becoming more fully valued than they have been in half a decade. Thus it should be time for investors to shift back toward the big caps and relearn to appreciate the lovely sight of dividends dropping like rose petals into their accounts every quarter.
To hunt for dividend-paying large caps -- and even some mid caps that could be big caps by the end of the year -- I searched our database for companies with market caps greater than $5 billion that offer a dividend yield greater than 2% and were rated a 9 or better by the MSN StockScouter rating system. Then, I sifted through the results to develop this list of 15.
| Divvy 'em up | | Large-cap stocks that pay promising dividends | | | | | | Company | Dividend yield | StockScouter rank | % chg YTD | 12/10 close | | Tenaris (TS, news, msgs) | 2.40% | 9 | 44.20% | $48.06 | | Chung Hwa Telecom (CHT, news, msgs) | 6.50% | 9 | 41.20 | $20.48 | | Reynolds American (RAI, news, msgs) | 5.00% | 9 | 30.30 | $75.77 | | Cemex (CX, news, msgs) | 3.00% | 10 | 28.80 | $33.75 | | Fidelity National Financial (FNF, news, msgs) | 2.20% | 9 | 28.00 | $45.13 | | Companhia Vale Do Rio Doce (RIO, news, msgs) | 3.60% | 9 | 26.60 | $24.67 | | Repsol YPF (REP, news, msgs) | 2.80% | 9 | 23.40 | $24.13 | | Clorox (CLX, news, msgs) | 2.00% | 9 | 18.20 | $57.40 | | PPL (PPL, news, msgs) | 3.30% | 9 | 14.70 | $50.20 | | Cincinnati Financial (CINF, news, msgs) | 2.50% | 9 | 11.70 | $44.40 | | Shell Transport & Trading (SC, news, msgs) | 3.50% | 9 | 10.50 | $49.78 | | Altria Group (MO, news, msgs) | 4.90% | 9 | 8.70 | $59.14 | | Dominion Resources (D, news, msgs) | 3.90% | 9 | 5.70 | $67.50 | | Weyerhaeuser (WY, news, msgs) | 2.40% | 9 | 4.70 | $66.98 | | KeySpan (KSE, news, msgs) | 4.70% | 9 | 3.30 | $38.03 |
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The list includes what you might expect: Several companies based in countries that have not forgotten the value of the dividends, some energy-complex companies that are capable of throwing off a lot of cash flow to shareholders and cigarette companies that are both undervalued and prodigious generators of cash.
Good counterbalance
While unexciting, they probably will provide the foundation for portfolios that have more speculative investments and trades as well. Theyre a good counterbalance for stocks like the ones I suggested you consider in the columns New dawn for living-dead stocks and 25 momentum stocks for the gambler in you.
Heres a quick look at some of the members of the group: - Tenaris (TS, news, msgs) is a maker of steel pipes for the oil and electricity industries, with major operations in South America and Europe. It has had a huge run to $50 from the $16 at which it traded back in late 2003. The stock has softened lately with the decline in energy prices. A spark in oil would reignite these shares.
- Cemex (CX, news, msgs), the big Mexican cement manufacturer, has just recently gotten off the mat and moved to a new high as word of a worldwide cement shortage has encouraged buyers to take advantage of its value opportunity.
- Cigarette giants Altria (MO, news, msgs) and Reynolds America (RAI, news, msgs) -- makers of Marlboro and Winston, respectively -- both have valuations that remain under pressure as cigarette litigation winds through the court system. But yields around 5% help to compensate shareholders for those risks.
- Among consumer products companies, Clorox (CLX, news, msgs) has been a clear winner for the past four years and shows no signs of mucking up its success. With its clear brand strategy and innovative marketing and product development teams, it has managed to generate superior returns on capital and equity both in the United States and abroad. Including dividends, shares are up 20.6% this year, which is all you could ask for.
It doesnt make sense to switch to an all-large cap portfolio, but, as you find opportunities to take profits in small caps, some of these -- and others Ill discuss in coming weeks -- may be sensible alternatives to consider.
Fine Print
Clorox has developed a bleach pen to help people get spots out of their clothes more conveniently. See it here. . . . Trennerts book is a good read from one of the Streets top young investment strategists. You can buy a copy of it here.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication he held positions in the following stocks mentioned: Fidelity National Financial.
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