Safe Havens

06/25/2004 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

"We expect dividend paying stocks to really shine in the second half of 2004," says Chuck Carlson, editor of The DRIP Investor . "For investors who are looking to add some safe-haven stocks to their portfolios, we have found some classic growth-and-income stocks."

"These stocks all merit consideration. They offer reasonable appreciation potential, yields in the 2% to 4% range, and solid dividend growth. This type of safe-haven stock generally does well during periods of market uncertainty. That’s because when capital gains become harder to achieve, the attraction for dividends grows.

"Bank of America (BAC NYSE) is among the largest banks in the country. Admittedly, it seems a bit incongruous to call a bank a defensive issue in light of the prospects of rising interest rates. However, I see Bank of America holding up well during a tough market period for a variety of reasons. First, while rising rates as a result of the improved economy will impact its mortgage business, the strengthening economy should spur loan demand from commercial customers. Also, I expect the yield of 4% to provide a downside cushion. Finally, Bank of America is already sporting a rather modest p/e ratio. Indeed, these shares trade at just 11 times expected 2004 earnings. The stock represents excellent value and is a solid buy for income and growth.

"Equitable Resources (EQT NYSE) is an integrated natural-gas company. Profits have grown nicely in recent quarters, and record earnings are expected for 2004 overall. Dividends have jumped sharply in the last two years, more than doubling in that period. Given the company’s fairly moderate payout ratio, plenty of room exists for additional dividend hikes. The stock currently yields over 3%, enhancing its total-return potential. Despite the recent market volatility, these shares continue to trade close to their 52-week high. Such resiliency during choppy markets is impressive and points to the stock’s defensive characteristics. The issue offers an interesting way to play continued strength in the natural-gas sector and is a buy at current prices.

"Exxon Mobil (XOM NYSE) is one of the best ‘easy hold’ stocks in the oil sector. On the one hand, Exxon Mobil is not the most leveraged way to play rising energy prices. Thus, these shares generally don’t lead the pack when oil prices skyrocket. On the other hand, Exxon Mobil usually displays impressive resiliency during bear markets for energy stocks. It would be hard to argue that oil prices are going to stay near $40 indefinitely. However, I believe prices will stay high longer than many market watchers expect. A strong economy in the US and improving global economies will continue to fuel demand for energy and continued strife in the Middle East will constrain supplies.

"Johnson & Johnson (JNJ NYSE) has one of the more impressive track records of any publicly-traded stock. It has had 71 years of annual sales growth and 42 consecutive years of dividend growth. The firm should post record profits in 2004 despite the increasingly competitive nature of the pharmaceutical markets. Johnson & Johnson’s diversified operations has helped shield it from downturns in any one area. After sporting p/e ratios in the 20s and 30s over the last decade, its current p/e ratio of 18 times 2004 expected earnings of $3 per share seems modest. The stock has held up well throughout the recent market choppiness, and I expect these shares to continue to display above-average relative strength. The issue, yielding more than 2%, is a solid choice in the health-care sector.

"Procter & Gamble (PG NYSE) has the type of consistent performance that investors usually find attractive during uncertain market times. The company’s performance in recent quarters has been especially impressive. The company has beaten analysts’ earnings estimates in each of the last four quarters. One driver of this turnaround has been new-product development. The strong earnings gains in recent years have fueled sharply higher dividends. I expect these shares to provide market-beating performance over the next 12 months, especially if the investment climate becomes more difficult. The stock is a top selection in the consumer-products sector."

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