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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Dividend Stocks Part 2

September 30th 2011 S&P500
Dividend Stock Part 2

The third quarter has ended, finishing out one of the worse quarters in a number of years. The third quarter earnings will tell us where we'll be heading, so conservative investors may want to wait to see what the corporate guidance looks like next month. Currently it seems the markets have priced in a lot of bad news. The valuations are certainly cheap as long as we don't go into another recession. The only sectors holding up are the Utilities, Consumer Staples, and Healthcare, or all the defensive plays. Even though the major averages are down significantly since the July highs, US corporations are set to report record earnings this year. The record earnings are producing strong free cash flow allowing companies to hike their dividends significantly. The recent pull back is boosting the dividend yields above most Treasury yields providing attractive valuations. It's only a matter of time before money rotates out of bonds back into equities. The rotation could come as early as next month. Below I have listed the nine major sectors and their largest components. Anyone looking to diversify their portfolio need only look at the top components from each sector with dividend yields better than any US Treasury bond out there. It's a rare occurrence when this exists, and hopefully for the bulls it won't last much longer.

Dissecting the sectors, as mentioned, Utilities, Consumer Staples, and Healthcare are the best performing sectors. Within the Utility space, names like Southern Company, Dominion, Duke Energy, and Exelon are yielding 4% to 5%, however, they trade for higher multiplies than the broader market at around 14 times earnings. The yields are twice what the 10 year Treasury and S&P 500 provide and higher than the 30 year bond. Defensive investors seem to be parking money in the utilities awaiting more clarity to regarding the European crisis and global slowdown.

In the Consumer Staples sector the yields are a little lower. Proctor and Gamble, Walmart, Coke, and Kraft are yielding 2.7% to 3.3%. Walmart trades for 11 times earnings, but the others trade for 14 times earnings. Two other components, Philip Morris and Altria yield 5% and 6.4% respectively and trade for 12 times earnings. Philip Morris recently hiked their dividend by an impressive 20%. In the Healthcare space, the drugs stocks are in vogue. Bristol Myers and Merck are yielding 4% or better. Bristol trades for 15 times earnings while Merck only trades for 8 times earnings. Quite a discrepancy. J&J, Pfizer, and Abbott Labs are yielding 3.5% or better. Pfizer not only has the best yield at 4.4%, but also the lowest valuation of just 8 times earnings.

Outside these three sectors, the market performance has been lousy this year, particularly since July. The financials remain the weakest sector. With the recent sell off, yields on JP Morgan and Travelers are now over 3%, better than the 30 year Treasury. Prudential and MetLife yield over 2.5%.

The Materials and Industrials are down 20% since the July highs on concerns of a global slowdown. Hopefully a lot of the bad news is priced into the stocks. Within the Materials, DuPont and Dow Chemical are yielding 4%. Both are trading for less than 10 times earnings however investors are concerned those earnings estimates will be cut. Freeport McMoran, Monsanto, Praxair, and Newmont Mining are all yielding 2% or better. Freeport yields 3% and trades for 5 times earnings. Freeport could have their earnings cut in half and still trade for just 10 times earnings. You'd think a lot of bad news has been priced into these stocks. In the Industrial space, GE and 3M are yielding 3% or better and trade for 10.5 times earnings. United Tech and Caterpillar are yielding 2.3% or better. Caterpillar only trades for 8 times earnings, yet many investors are expecting those estimates to come down next month.

The Energy sector which is primarily oils is unchanged for the year. The two largest components Exxon Mobil and Chevron are yielding 2.6% and 3.3% respectively. Oil drillers Transocean and Diamond Offshore yield over 6% however their earnings can be volatile. Hess has been featured recently due to the low valuation, plenty of oil and gas discoveries in North Dakota and Utica shale regions, and recent insider buying with their CEO acquiring $10 million worth of stock at higher prices. Yet Wall Street is not interested.

Other sectors have similar stocks with attractive yields. In the tech space Microsoft and Intel are yielding 3.7% and 4% respectively. McDonalds in the Consumer Discretionary sector is up 21% since the March lows hitting an all time high recently and yet still yields over 3%. Very impressive.

One subsector, Telecom has some of the highest yielding stocks. The two blue chips AT&T and Verizon are yielding 6% and 5.3% respectively. Frontier is the highest yielding S&P 500 stock at 12%, but that dividend is not safe.

Even the Transportation sector has some nice dividend paying stocks with the recent correction. Union Pacific, FedEx, and UPS are yielding 2%, 3%, and 3% respectively.

It's a rare opportunity to buy so many blue chips yielding 3% or more in any sector you want. Hopefully the third quarter earnings will ease concerns enough regarding the European crisis and the global slowdown to allow investors to rotate into equities.