4 of the Least Risky Stock Picks

02/21/2013 10:15 am EST


Richard Band

Editor, Profitable Investing

Yield and growth make a nice combination, says Richard Band of Profitable Investing.

In a high-risk world, you want to own stocks that will reward you if the Dow keeps surging, and treat you gently if old man market falls flat on his keister.

Here are four stocks that offer that magic combination of much more upside potential than downside. All four companies will likely post record earnings in 2013. In addition, they sport dividend yields comfortably above the market average, giving the shares defensive appeal:

Coca-Cola (KO)
The world's best-known brand, Coke also merits fame for the defensive prowess of its stock. During the 2007-2009 bear market, KO fell 42% less than the S&P 500, and actually rose during the 2000-2002 bear.

The company's array of low-cal and no-cal beverages not only rolls up excellent profits, but also helps blunt media concerns about dietary sugar. Current yield is 3.3%. Dividend sweetened 50 years in a row—next boost due around mid-February.

McDonald's (MCD)
Wall Street went apoplectic when Mickey D’s sales growth tailed off for a number of months last year. Now, though, the Golden Arches seem to be regaining their sheen, with global same-store sales up 2.4% in November.

To build customer traffic in today’s challenging economy, CEO Don Thompson—a master marketer—is pushing a “barbell approach,” with premium items like McRib thrust into the promotional spotlight alongside the Dollar Menu. Meanwhile, the stock boasts a current yield of 3.4 %, more than the longest-dated Treasury bond. Annual dividend hikes since 1976.

Microsoft (MSFT)
The technology giant everybody loves to hate, MSFT nonetheless possesses some formidable strengths, such as $67 billion of cash on its balance sheet and 36% operating profit margins. Did I mention that MSFT also throws off a 3.4 % dividend?

Says Matthew McLennan of top-performing First Eagle Global Fund, “Just like Coke didn’t have to invent Burgundy wine or hot coffee, Microsoft doesn’t need to invent every new category of software. It’s enough for Coke to dominate sugared water, and for Microsoft to have a dominant position in operating systems, office applications, and server software.

Southern Company (SO)
The highest yielder in the group (4.5%), this Atlanta-based electric utility features one of the industry’s strongest balance sheets (low debt). In fact, Fortune magazine has ranked the company No. 1 among electric and gas utilities for financial soundness three years in a row.

SO’s low retail electric rates also help maintain good relations with regulators and customers. Dividends—increased every year since 2002—have easily outpaced the cost of living, a trend I expect to continue in 2013 and beyond. (Great for retirees.)

From today’s levels, I project a year-ahead total return—dividends plus capital appreciation—of at least 12% for MCD and SO; 15% for KO; and 20% for MSFT. If you can afford just one, make it Coke. Very few stocks offer 15% upside potential in the coming year with so little risk as KO.

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