Tue. May. 12, 2009

High-Quality Low-Risk Dividend Stocks *

To a large extent we are a product of our environment. Our life experiences not only shape out behavior, but at its very core, they shape our thought process. The Great Depression forever changed a generation of people. It appears the “Great Recession” may be having a similar effect on another generation.

In a May 5th MSN Money article, Kathy Kristof explores what effect the financial crisis is having on Generation Y (those born between 1977 to 1994).  It seems that this generation that lives life on the edge in most of their pursuits, are quite risk-averse when it comes to selecting their investments. That could be a decision that results in them coming up short in retirement. Here are some other interesting items from the article:

  • 20- and 30-somethings put their retirement money in bank accounts, Treasurys or gold to simply “preserve” their savings.
  • Only about half of all workers have access to a 401(k) plan, and only about 40% of the 20-somethings who are offered a 401(k) even participate
  • if you had a diversified portfolio made up of 70% stocks and 30% bonds — about right for someone in their late 20s — you could reasonably expect to earn an average of 8.9% on your money over time
  • Between 1929 and 1932, stocks lost roughly 85% of their value. But, in 1933, prices roared back, soaring nearly 54%.
  • stocks gained an average of 18.2% annually during the 1990s (about double the historic average)

There are much better alternatives for the ultra-conservative Gen Y investors than money market accounts, Treasuries and CDs. A conservative strategy focusing on high quality, low risk dividend stocks should significantly out-perform the above investments, with very little incremental long-term risk. Based on my risk rating, here are five low risk companies for conservative investors to consider:

1. The Coca-Cola Company (KO) – Risk Rating: 1.25 – Yield: 3.82% (analysis)
2. Johnson & Johnson (JNJ) – Risk Rating: 1.25 – Yield: 3.62% (analysis)
3. The Clorox Company (CLX) – Risk Rating: 1.25 – Yield: 3.45% (analysis)
4. United Technologies Corporation (UTX) – Risk Rating: 1.00 – Yield: 2.97% (analysis)
5. SYSCO Corporation (SYY) – Risk Rating: 1.00 – Yield: 4.06 (analysis)

What the Gen Y investors haven’t realized is that the path they are following carries risk also. Ironically, they may have chosen the most dangerous investment of all.

Full Disclosure: Long KO, JNJ, CLX, UTX, SYY (my income holdings)

8 Responses to “High-Quality Low-Risk Dividend Stocks *”

  1. I own KO and SYY, but also own KMB, PEP, MMM, PG, ADP, KFT and BMY. Of those, KMB is the one which I have the largest holding. Why didn’t you include it?

  2. Joseph: I considered KMB, but rejected it due to its debt. KMB’s debt to total capital is currently at 61%. I prefer something less than 35%, but can work with up to 50% in certain circumstances.

    Best Wishes,

  3. Thanks, yeah they do have a little more debt than I like, also. So, I’m at the limit of my exposure to them.

    I would like to pick up more of KO, having sold some when it was higher, hoping to buy it back cheaper. But, one thing I worry about KO, is though their debt numbers look good, that they are in so many countries, plus so much of their debt and costs are hidden in their bottler companies books, that are their numbers really as visible as one would like? How do you feel about that? Plus, do you have a target price to buy more? I wish I had picked up some more when it dipped below 40. So, I’m hoping for KO to dip somewhere near 40-42.

  4. Joseph: Given that KO has spread the bottler risk over many smaller companies, I am less concerned about a wide-spread failure. It is is KO’s best interest for them to succeed. By current buy price for KO is $40.55. It doesn’t look like I will be buying anytime soon. I was fortunate to pick up some back in March at $39.69.

    Best Wishes,

  5. OK, I’ll go with about 40.55 for a potential buy point. The darn thing is I see many other companies I like, which I already own, which are still pretty cheap. The market seems to prefer the more risky companies, but eventually the typical defensive, well capitalized dividend paying stocks with some growth attributes, will have their day and return to their recent years’ highs, in my opinion.

    One stock I have been in and out over the years has been MAT. MAT, and HAS, both seem to fit my type of well-capitalized dividend paying company with top-notch brands, though they both didn’t raise their dividends the last time when due annually. Plus, MAT’s price does fluctuate a lot. The thing about MAT, is since their dividend is paid annually, like I did last year is look for a dip in price a month or so before they declare their dividend, grab the dividend then decide how long I want to hold it. Have you ever considered either MAT or HAS?


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