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IQ Trends: The Lucky 13

02/03/2014 9:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

For our annual "The Lucky 13" portfolio, we attempt to select stocks that exhibit high-quality, offer good value, and have attractive dividend yields, explains dividend and value investing expert Kelley Wright, editor of IQ Trends.

Hopefully, those characteristics will provide both safe, and excellent returns over the coming year and years to follow.

Abbott Laboratories (ABT) is a well-established, global health care company with an S&P “A” Quality Ranking. Fiscal year free operating cash flow is three times its dividend, which is no surprise for this long-time Dividend Aristocrat. A solid anchor position for any portfolio.

Baxter International (BAX), another defensive anchor position, has an S&P “A+” Quality Ranking and outstanding annual dividend growth. Its return on equity for the trailing twelve months and five-year average are 29.31 and 30.42, respectively.

ConocoPhillips (COP) is into the second phase of its multi-year makeover. Having disposed of over $12 billion in unwanted assets, the company is now focused on growth. By all measures, COP is well on its way to challenging the giants in the oil and gas industry.

CVS Caremark (CVS) is the 800lb gorilla in this space. An “A+” S&P Quality Ranking, and free operating cash flow of three times the dividend. CVS just produces year in and year out.

Chevron (CVX) is just a beast. There's a lot to like here: A $4.00 per share dividend; an S&P “A+” Quality Ranking, and a Dividend Aristocrat to boot. A must position for a quality portfolio.

Coca-Cola (KO) is a Dividend Aristocrat. In a world gone mad, what could be more sane than buying one of the world's best known trademarks that has grown profits in 76 of the past 80 years, has a return on equity of over 30, and offers an S&P Quality Ranking of “A+”? Yeah, we'll take that.

McDonald's (MCD) is not just any other company; it is an icon. Its strong performance has continued for the past ten years. It has an S&P “A” Quality Ranking, a Dividend Aristocrat, and a $3.24 dividend.

Occidental Petroleum (OXY) is undergoing a makeover, becoming a smaller, more efficient company with more exposure to shale assets in the US than higher-risk, overseas geographies. Proceeds from overseas sells are going toward purchasing more domestic assets and share buybacks, which should boost its valuation. We like the outstanding dividend growth.

PepsiCo (PEP) is a much more diversified company than Coca-Cola, with some pretty well-known brand names of its own: Frito-Lay; Tropicana; Quaker; Rice-A-Roni, and Gatorade. With two thirds of its revenues generated from snacks and other foods, PEP is a nice compliment to KO in this defensive sector. PEP is a Dividend Aristocrat and has an S&P “A” Quality Ranking.

Tobacco is a controversial business; but for Philip Morris International (PM), it's a market basically unaffected by economic slowdowns or rising commodity prices, which means it is stable and defensive; a combination we can live with. We also like the $3.76 dividend, outstanding growth, and a five-year average return on equity of over 160.

Reliance Steel & Aluminum (RS) is North America's largest metals service company and is looking to get even bigger. The company has increased dividends 20 times since its IPO in 1994, so its designation for outstanding dividend growth is a no-brainer.

We like energy, a sector that is benefiting Union Pacific (UNP). With limited pipelines, however, crude oil and petroleum derivatives have to get to refineries and ports somehow. With almost 32,000 rail miles linking both coasts and the Midwest with the Gulf ports, UNP is just the ticket. The $3.16 dividend is very attractive, as is the S&P “A” Quality Ranking.

ExxonMobil (XOM) is the oil and gas giant. With a 12.8% dividend increase over 2012, XOM is a Dividend Aristocrat and it has an S&P “A+” Quality ranking.

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