In a jittery market, it makes sense to scout out stocks that pay a high dividend yield. First off, dividends can provide investors a steady return, even when stock prices are volatile, says Edward Jones financial adviser Jesse Abercrombie. In fact, a 4% annual dividend is enough to double the money investors make on a stock purchase in about 18 yearsâ€”that is before factoring in stock market gains over time [based on the rule of 72: 72 / % return on money=years to double money].
On top of that, dividend payers are particularly valuable in a shaky economy (see â€śHow You Can Profit from Market Volatility,â€ť this issue). Thatâ€™s because they require a hefty commitment on the part of corporate management. Think of it this way: A company has to be pretty confident about its business in order to share a slice of its profits with shareholders. Dividend payers tend to be large, blue-chip companies with a proven track record of results. Itâ€™s that sort of dependability that helps to steady the performance of dividend-paying stocks in turbulent markets.
Then thereâ€™s the fact that interest rates on Treasury bonds have been quite low. Abercrombie says dependable companies that pay an above-average yield (the ratio of a companyâ€™s annual dividend payout to its stock price) are an attractive substitute.
A Texas native, Abercrombie works in the investment firmâ€™s Dallas office, where he manages money for high-net worth clients. Named a top financial all-star by Black Enterprise in 2010, Abercrombie talked to BE about three of his stock picks.
1) Johnson & Johnson (JNJ) is one of just four companies that carry a AAA grade on its debt. The company offers a 3.6% yield and has been very reliableâ€”itâ€™s made steady payments since 1944 and has increased its dividend annually for the last 49 years. I think the company can accelerate its earnings growth over the next few years thanks to breakthroughs from its biopharmaceutical businesses. The companyâ€™s pipeline includes potential new treatments for Alzheimerâ€™s disease, prostate cancer, hepatitis C, and a stroke prevention medicine. In our view, shares do not fully reflect the value of J&Jâ€™s pipeline potential, and as a result we believe shares are attractively valued. Meanwhile, J&J should be affected less and less by major patent expirations on earlier products.
STOCK PRICE: $64.36Â Â â€˘Â Â DIVIDEND YIELD: 3.6%
(Continued on Next Page)