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Wednesday, June 1, 2011

5 Dividend Stocks In Need Of A Market Correction

We have all heard that trees don't grow to the sky, but that seems to be what is happening in this bull market that started back in early 2009. When investors see their portfolio dramatically increase in value, it leaves them with a sense of accomplishment. However, if you are an investor in dividend growth stocks, a higher portfolio may not be in your best interest. Consider the following...

Higher Values, Lower Yields

One of my favorite comments from the unenlightened is, 'How could you buy XYZ stock? Its price has been flat for over 10 years!' If a company has increasing earnings, cash flow and dividends for 10 years, and there is nothing fundamentally wrong with the company, I am ecstatic if the stock price is flat.

When this occurs the shares purchased today will have a significantly higher initial yield than the ones purchased 10 years ago. Conversely, when share price appreciates at a higher rate than than the dividend grows, the current yield drops.

As a dividend growth investor, the one thing that will generate more income and increase our wealth is the ability to buy undervalued blue-chip stocks.

Chaos Can Bring Opportunity

Stocks are rarely fairly priced. On any given day, the market is driven by emotion (either fear or greed), but over the long-term it will trend toward a fair mean.

Knowing this, allows us to overcome the emotional hurdle of buying when the market appears to be a total melt-down. The more perceived chaos and fear in the market, the greater our potential opportunity.

A market correction will drive value.

Dividend Stocks Needing A Market Correction

Here are five stocks that would be a buy today with a 10% correction:

Medtronic, Inc. (MDT)
Medtronic Inc.is a global medical device manufacturer has leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management, and other medical markets.
Current Yield: 2.2% | Current Stars: 2
10% Correction Yield: 2.5% | 10% Correction Stars: 4

General Dynamics Corp. (GD)
General Dynamics is the world's fifth largest military contractor and also one of the world's biggest makers of corporate jets.
Current Yield: 2.6% | Current Stars: 2
10% Correction Yield: 2.9% | 10% Correction Stars: 5

The Coca-Cola Company (KO)
The Coca-Cola Company is the world's largest soft drink company with a sizable fruit juice business.
Current Yield: 2.8% | Current Stars: 2
10% Correction Yield: 3.1% | 10% Correction Stars: 5

Genuine Parts Company (GPC)
Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Current Yield: 3.3% | Current Stars: 2
10% Correction Yield: 3.7% | 10% Correction Stars: 4

Cincinnati Financial Corp. (CINF)
Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.
Current Yield: 5.3% | Current Stars: 3
10% Correction Yield: 5.9% | 10% Correction Stars: 5

A correction is not something to be feared, but is necessary for and will benefit those with a long-term view. Fearful investors will sell their blue-chip stocks to someone in a down market, and when the chaos occurs I plan on being at the front of the line.

Full Disclosure: Long MDT, GD, KO, GPC, CINF. See a list of all my income holdings here.

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(Photo Credit)

Tags: [MDT] [GD] [KO] [GPC] [CINF]

2 comments:

  1. I have been following KO for awhile now and agree that it has gotten a little pricey. But I am sure that it is partially a defensive maneuver do to economic uncertainty.

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  2. I do not feel that KO is pricey or overvalued. I base this on its current vs historical yield. KO's current yield is about 2.87%. Over the past 10 yrs or so, its avg yield has been about 2.27%. In Dec 1999 the yield was around 1.5%. By my calculation, KO is about 1.57 standard deviations better than average yield...and become overvalued at around a yield of around 1.69% and undervalued at a yield of around 2.85%. imho.

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