Dow Theory's "2-5-10" Club

07/30/2004 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

When buying stocks for income, investors too often focus exclusively on yield," notes Richard Moroney, editor of Dow Theory Forecasts. "A better approach is to consider a stock’s total-return potentialyield plus appreciation prospects plus expected dividend growth."

"Dividend growth potential is especially relevant during periods of rising inflation. Indeed, high-yielding stocks with no dividend growth are somewhat akin to bonds with their fixed coupon paymentsthe static cash-flow stream offers no hedge against rising inflation. On the other hand, a rising dividend affords some relief from the inflationary impact on an investor’s cash-flow stream. The stocks listed below are members of what the Forecasts calls the 2-5-10 Club: Each of the stocks yields at least 2%, a premium to the S&P 500 Index’s current yield of 1.7%. Each of the companies raised its dividend at least 5% in the last year. Each of the companies has increased its dividend annually for at least the last ten years.

A.J. Gallagher (AJG NYSE)
Altria (MO NYSE)
Bank of America (BAC NYSE)
Citigroup (C NYSE)
Exxon Mobil (XOM NYSE)
Fannie Mae (FNM NYSE)
General Electric (GE NYSE)
Johnson & Johnson (JNJ NYSE)
Marsh & McLennan (MMC NYSE)
Questar (STR NYSE)
Wells Fargo (

"Here, we profile two of these firms, both of which have our top Focus Buy list rating:

"Bank of America is one of the more impressive members of this exclusive club. The yield of 3.8% is more than double the yield on the broad market. Dividend growth has been especially impressive. The company has boosted its dividend at an annualized rate of approximately 12% over the last 25 years. Despite fears of rising interest rates, Bank of America stock’s resiliency has been especially appealing. The stock recently moved to a new 52-week high and is approaching its all-time high of more than $88 posted in 1998. Bank of America, trading at less than 12 times consensus 2004 earnings estimates of $7.26 per share, is one of the top growth-and-income investments in the financial-services sector and carries both a Buy and Long-Term Buy rating.

"Johnson & Johnson is the low-ranking member in this club when it comes to yield. Still, the 2% yield represents a premium to the broader market. And what Johnson & Johnson lacks in current yield it more than makes up for with consistency and dividend growth. The company has paid a dividend every quarter since 1944 and has boosted its dividend annually for the last 42 years. The most recent increase was a 19% jump earlier this month. Johnson & Johnson has turned in a solid performance so far in 2004, rising nearly 9% and far outpacing the 2% return on the S&P 500 index. Still, these shares remain well under their 2002 peak of nearly $66 per share. The stock trades at roughly 20 times trailing 12-month earnings per share, a significant discount to its five-year average p/e ratio of nearly 27. The discounted multiple reflects Wall Street’s ongoing concerns about a profit slowdown for most large pharmaceutical companies. However, Johnson & Johnson’s diverse product line in the health-care sectorpharmaceuticals represent less than half of total revenueshould help it weather downturns in any one market segment. Johnson & Johnson, currently offering that rare combination of premium yield, dividend growth, and appreciation potential, is rated Buy and Long-Term Buy."

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