Stock of the Week
A one week reprieve from selling didn't last long. A four hundred point sell off on Thursday brought the sellers and the fears back to the markets. The only trades that seem to be working are buying gold and Treasuries. With rates so low, the Fed is pushing investors into riskier assets including stocks paying good dividend yields. Luckily, a number of blue chip stocks have raised their dividends in the last year. In fact, within the S&P 500, 98 stocks are now yielding more than the 30 year bond at 3.45%. The main cause for the sell off once again is European banking and fears of a worldwide economic slowdown. In fact, Morgan Stanley lowered their GDP growth forecast for the whole World this week. With rates remaining low for the foreseeable future, the recent sell off is allowing investors the opportunity to get into blue chip high yielding stocks for the long haul.
Starting at the top, defensive blue chips with the highest dividend yields in the S&P 500 include AT&T, Altria, and Reynolds America all above 6%, trading for 12 times earnings or better. Verizon's yield is at 5.7%, trading for 13 times earnings. Utility firm, Duke Energy is yielding 5.5%, trading for 12 times earnings. Another utility, Progress Energy is yielding 5.3%, trading for 14.5 earnings. Lorillard another defensive play is yielding 5.3% and trades for 12.4 times earnings.The best yielding drug stock is Eli Lilly yielding 5.5%, trading for 9 times earnings. Bristol-Myers Squibb, Pfizer, and Merck yield 4.70% or better. Merck and Pfizer trade for 8 times earnings while Bristol trades for 13.5 times earnings.
The oil sector has also recently been hit. Oil driller, Diamond Offshore is yielding 6% and trades for 12 times earnings. Conoco Phillips is yielding over 4.3%, trading for 7 times earnings. Chevron is yielding 3.3%, trading for 7 times earnings. Even Exxon Mobil is trading for 8 times earnings and yields 2.6% which is equivalent to a 15 to 20 year Treasury. The major banks are all trading for less than book value, less than tangible book value, yet no one wants to touch them.
Eventually sanity will come back to the markets, but we'll need to see a little clarity in Europe and better economic numbers that hopefully will keep us out of a recession. Short term, the averages can certainly go lower, but long term the blue chips in the S&P 500 are providing compelling valuations with dividend yields better than any other comparable investment product out there.