Whew, these markets are swift, illiquid and sensitive. They are also continuing to function in a def...
5 Stocks to Capture Great Dividends
11/21/2011 7:00 am EST
The current market volatility means investors should check out stocks with solid earnings growth that are also paying good dividend yields, says advisor Dan Genter. The notion of dividend investing has changed, he notes, with even techs and consumer companies in that category along with old standbys such as industrials and utilities.
Kate Stalter: Today I’m on the phone with Dan Genter of RNC Genter Capital Management.
Dan, I wanted to start out asking you a little bit about the overall market. The indexes have been whipsawed by the European news lately. Has earnings season, in your view, been overlooked?
Dan Genter: Well, I think it has. I think what you’re really seeing is that we have a wonderful parade that’s going on here with regard to earnings.
Basically the black clouds are just blocking out all the sunshine and raining on the parade, if you will, because the earnings themselves have really demonstrated, I think, far more than what people anticipated.
I say that because everyone looked at last year and said, “Well, we’re seeing nice earnings, but basically it’s only due to cost cutting, and it just can’t continue.” And even though that’s going to certainly slow as we go into 2012, I think the surprise this year is the ability to see earnings increase, see margins stay fairly strong, and to do that with very, very small top-line growth.
So I think that when you look at the fact that overall this quarter, we’re going to see, once again, in excess of 15% increases in earnings, you’re seeing something that’s very, very positive, especially with the large-cap stocks.
Yes, the major part of cost cutting is probably behind us, but we can continue to maintain at least modest, certainly high single-digit to maybe low double-digit growth with the current situation that we have with the very marginal economic growth. I think that’s favorable, and it’s just not reflected in stock prices right now.
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Kate Stalter: Do you believe, given all that, though, that the European situation might continue to be that rain cloud you were mentioning?
Dan Genter: Well, I think it certainly is. I mean, it’s a major contagion. There are some aspects of it that are very real, and certainly we can’t be in the situation here where we’re whistling through the graveyard.
But on the other hand, there are some of these situations that are going on there that are going to have very little effect on the overall US market. But I don’t know that you’re going to wring that out of the psyche of investors, so I think you’re certainly going to have that overhang.
But I think that one thing that we’re seeing in this market now is that you have a completely new government, with the resignation of the Prime Minister in Greece; you also have the same thing in Italy. Again it would not be unlikely that we see it in some other governments as they go through some major austerity programs.
The fact is: The US market’s been volatile, but the US market is still exactly where it was about three months ago, and not too far different from where it was a year ago, so it’s actually shown some pretty surprising resilience. So Europe doesn’t need to go away; we just need to have a little cessation of some of the headlines or where it’s just not front page every single morning, and I think we can slowly start to move forward.
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Kate Stalter: Let me switch gears here a little bit. One of the things you look at is dividend-paying stocks. How should investors be evaluating dividend payers at this juncture in the market?
Dan Genter: Well, I think it’s going to be very key, and we do a lot of different equity strategies here in my firm. It’s not the only thing that we do, so I’m not totally biased if you will.
I think the important thing is that in this kind of a market, which we talked about earlier—which is going to be moderate earnings growth, very, very subdued type top-line growth, but positive—then it is a very difficult market for the overall market and stocks in general, to really have a big breakout. And frankly, even though we expect we’ll see some modest multiple expansion, it’s a tough road and it’s a tough weight to carry to really have significant multiple expansions.
So when you start to look at, “Well, what is going to generate your total return?” Well, the fact of the matter is, the two old components that have been around for a quarter of a century are not going to change, and that’s going to be tracking earnings growth with a fairly constant multiple, and then the dividend.
So when you’re dealing with an environment where I think everyone would be very, very happy if they could say, “Hey I’m going to get 8% to 10% out of my equities in this current environment,” then you’re now looking at dividends that are a much more substantial component of total return, and indeed may be 40% or 50% of your total return.
So now being in a position where you have this positive cash flow somewhere in the 4% to 5% range, it’s not only, frankly, a good return in and of itself, but certainly it’s going to constitute a very high percentage of what you hope to be able to achieve.
And you pretty well have a high degree—as long as we have some moderate economic growth—of surety, that that investment motor, if you will, is going to continue to run, even as you try go upstream. And you’re going to have some positive results that you can really count on coming in, and I think that’s going to be very important.
Kate Stalter: Let’s talk about some of the names that you have been watching. I heard you talk about Intel (INTC), for example, in a recent interview. Is that still one you like?
Dan Genter: Absolutely, and I think Intel is a particularly good example because what it really shows is, that the idea of investing for dividends has had a major metamorphosis. This is not your grandfather’s portfolio anymore.
I mean, you really can get representation in all the major economic sectors. Certainly, the conventional ones of utilities and industrials, but then looking at the consumer staples and consumer durables and non-durables—and then in particular, where Intel is, in technology. I mean, an area where you were traditionally either paid very little dividends or no dividends, and certainly would not really come up in someone’s mind when you spoke about dividends.
Now you have companies like Intel that’s paying a 3.5% dividend, you’re certainly going to have, we feel, growth of about 10% when you start to look at the next several years, and is trading at a price-to-earnings multiple of 10. So you have a company that’s going to have, certainly at least very reasonable type of growth trading at a low valuation, if you will, historically.
And let’s say it does mill around with the overall market for the next several months. I mean, you’re getting almost 4% while you wait.
Kate Stalter: Any other names that you think are worth a look right now, Dan?
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I think in the consumer staples area, in particular, I like having, frankly, some of the “addiction stocks” with Philip Morris (PM) and Altria (MO). Philip Morris International, you’re going to have high single-digit growth, and you have a 4.5% dividend. You have Altria, not as good of growth, but about a 7% dividend now, and the fact is: People are going to continue to smoke and drink, especially in this market.
Kate Stalter: Any final words of wisdom for individual investors who are kind of struggling to get through this particular market and this particular economy?
Dan Genter: Well, I think that right now it’s just no time to be a hero. I think that people that are trying to find the next stock that’s going to have a big pop to the upside, and that the risk levels in those types of stocks right now are high.
I think it’s just really a time to sit back and not only look for earnings levels, but the visibility of earnings and the predictability of earnings is, frankly, probably going to be more important than the absolute level of earnings.
So looking for those that are going to have consistency and that are just not going to have any negative surprise, and if you can get a nice fat dividend to go with it, then you’re all the better off.
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