In fact, when stability and safety are your primary concerns, I think these types of companies should ALWAYS form the core of your portfolio.
At the same time, I realize you might be looking for slightly more aggressive ideas. That’s why I went looking for dividend-paying firms in three of the most cyclical sectors — industrials, materials, and consumer discretionary. All of these firms are naturally tied to the health of U.S. economy — which makes them very contrarian plays right now given the recent spate of poor economic data we’ve been getting.
I limited my search to companies with the following characteristics:
- A payout ratio of 60 percent or less, meaning they have a reasonable cushion to support their future dividend payments …
- An increase in their payments of at least 5 percent in the last five years, which shows special strength since that’s when the financial crisis really got going …
- Plus, an annual yield of at least 2 percent — to guarantee that you’d be getting a return above the market average.
I also made sure that each company was liked by other Wall Street analysts I respect.
Here are the names that came out of my search …
Among the discretionary companies I found, Target really stood out. Not only has the company boosted its dividend more than 27 percent since 2007 … but it its payout ratio of 26 percent suggests there is plenty of room for future dividend hikes.
Fundamentally speaking, Target seems to have solidified its place as one of the primary destinations for bargain-hunting shoppers. It’s interesting to think about these kinds of trends over longer periods of time. I distinctly remember K-Mart being the go-to place for everyday necessities back in the 1980s.
Today, Target provides a slightly more modern version of that exact same experience, and I expect it will continue to do so for many years to come.
I was also surprised just how many aerospace and defense firms made the list — Boeing (NYSE:BA), General Dynamics (NYSE:GD), Honeywell (NYSE:HON), L-3 (NYSE:LLL), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), Raytheon (NYSE:RTN), Rockwell Collins (NYSE:COL), and United Technologies (NYSE:UTX). That’s nine companies, almost a quarter of the 38 companies that I initially turned up!
Rather than even try to figure out which one of these particular companies is the absolute best choice, you might be better off simply buying an ETF that gives you access to the entire group in one fell swoop. Two good choices: The PowerShares Aerospace & Defense fund (NYSEARCA:PPA) or the iShares Dow Jones U.S. Aerospace & Defense fund (NYSEARCA:ITA).
You won’t get quite the same yield as picking a single stock because each of these ETFs is only yielding about 1 percent right now. However, you’d be getting less stock-specific risk as a tradeoff.
Another individual company that piqued my interest was International Flavors and Fragrances. I used to write about this chemical company quite frequently when I worked at Standard & Poor’s, and always admired its business position.
UPS is one other firm to consider. At 16.4 times earnings, the stock isn’t dirt cheap but given its current annual yield of 3 percent, it would be a good way to bet on a global economic recovery.
The reason is simple: As businesses pick up, more packages start circling the world … and as one of the primary carriers of those packages, UPS would see its volumes (and profits) rise accordingly.
Just remember that fuel prices can put a crimp in results. And that’s also true for other companies on this list, especially firms like Ryder System.
Please note that I’m not saying any of these companies are “buys” right now. However, I do think many of them merit further research if you’re looking to add a bit of edge to your existing holdings.
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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