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8 of the Lucky 13

01/25/2013 7:15 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

An annual tradition for the past 13 years, this list of stocks tends to be a good selection of stocks for the year, all things considered, notes Kelley Wright of Investment Quality Trends.

In January, 2000, we initiated a first-of-the-year feature to assist subscribers in this endeavor. Dubbed "The Lucky 13" portfolio, the feature has been both popular and successful. Not every stock in each Lucky 13 has been a winner; however, there were enough winners to produce ten years of positive total returns for the overall portfolio.

Below we present our new portfolio for 2013. As always, we attempt to select stocks that exhibit high-quality, offer good value, and have attractive dividend yields. Hopefully those characteristics will provide both safe and excellent returns over the coming year and years to follow.

Automatic Data Processing (ADP): Sector = Technology; Industry = Business Software & Services. Simply one of the best management teams in our universe of Select Blue Chips. 38 consecutive years of dividend increases makes them an Aristocrat. Their average annual dividend increases in excess of 10% per year for 12 years earns them the IQT "G" rating. Zero long-term debt to equity and a return on equity well into the 20% range; this is a tech stock you want to own.

Air Products & Chemicals (APD): Sector = Materials; Industry = Chemicals - Diversified. A major producer/supplier of gases, performance materials, equipment and services worldwide. IQT "G" rated, 30 years of consecutive dividend increases with an over 11% annual distribution increase over the last decade. Big cap-ex over the last few years should yield strong total returns.

CVS Caremark (CVS): Sector = Consumer Staples; Industry = Services/Drug stores. Prescription Benefit Management (PBM) is the key to the growth story at CVS. An IQT "G" rating for outstanding dividend growth, an "A+" Quality ranking from S&P and a payout ratio of just 39% of free cash flow presents a compelling opportunity for both growth of capital and income.

Johnson & Johnson (JNJ): Sector = Health Care; Industry = Drug manufacturers - Major. Our lone pick from the healthcare sector and the most defensive, JNJ could be the ultimate fixed-income alternative. While a little boring the dividend is safe and the "A+" quality ranking is the highest. A great cornerstone stock for any portfolio.

Procter & Gamble Co. (PG): Sector = Consumer Staples; Industry = Personal products. PG is the undisputed big dog in the sector with an almost 14% weighting. With 56 consecutive years of dividend increases PG is both an Aristocrat and an IQT "G." We like the "A+" quality ranking from S&P along with the $2.25 dividend.

Reliance Steel & Aluminum Co. (RS): Sector = Materials; Industry = Metal fabrication. RS has averaged dividend increases in the teens for the last 5 & 10 years but their increase this year was a doozy. Surprisingly, the payout is still only 30% of free cash flow. With some fiscal sanity the economy, and this stock, could take off. An IQT "G" stock.

Union Pacific Corp (UNP): Sector = Industrials; Industry = Railroads. UNP must see huge growth down the road because their dividend increases have been substantial; 26% over 5 years and 17% over 10 years. We think they're onto something, as does S&P with its "A" Quality ranking. Another IQT "G" stock to be sure.

United Technologies Corp (UTX): Sector = Industrials; Industry = Conglomerates. Our third selection from the Industrials sector, UTX is about as diversified a company there is. There is a lot to like with UTX, specifically its "A+" Quality ranking and IQT "G" rating. The long-term debt to equity is a tad higher than we prefer but their payout as a percentage of free cash flow and return on equity is so strong it is good debt we can live with.

Related Readings:

A Tasty Treat for McDonald's

A Bargain Closed-End Income Fund

Where to Hunt for Big Yields

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