Thanks to Fed Chairman Ben Bernanke, the nation’s savers can spend another two years roaming the desert.
By promising to keep his zero interest rate policy (ZIRP) in place until 2013, Bernanke proved once again that he is a saver’s worst nightmare. Instead of offering people some manna from heaven, he kicked them where it counts.
Essentially, the Fed told those with a nest egg to protect that they need to look elsewhere if they have any hopes ever of capturing some yield again.
(In Ben’s world, the idea of money in the bank earning a reasonable interest rate is a dangerous thing.)
Unfortunately, that leaves investors who also need a measure of safety very few desirable options outside of U.S. Treasuries, whose yields have also been driven into the dirt (as evidenced by the paltry 2.15% yield on ten-year notes).
Factoring in an official inflation rate of 3.63%, that makes dividend-paying stocks the next best option for investors actually looking to grow their savings.
In today’s tumultuous markets, the good news is that dividend-paying blue chip stocks have actually gone on sale…
But as the herd hits the panic button, the good companies often get taken down with the bad.
The Safety of Blue Chips
At this point, nibbling on blue chips stocks is the investment strategy that makes the most sense for investors seeking decent yields along with a measure of long-term safety.
The reasons for this are pretty simple…
Blue chip stocks are the best of the best, and financial stocks aside, they are going to be with us for a long, long time. The name “blue chip” itself comes from the world of poker, in which the color blue signifies the chips of highest value.
If you’re able to build up a stack of these during a downturn, you will likely wake up at some point in the future well ahead of the rest of the players.
So what should bargain hunters be looking for these days as they troll for the winners amidst the fire sale?
In general, investors should be looking for companies that all have — at a minimum — the following six characteristics (i.e. the things that make them blue chip stocks in the first place). They are:
- A nationally recognized, well-established company
- Companies that sell high-quality, widely accepted products and services
- Companies that are known to weather economic downturns
- Companies that can operate profitably under adverse economic conditions
- Companies with a long record of stable and reliable growth
- Companies with a solid and consistent dividend history
Three Stocks for the Long Haul
As a general rule of thumb, a fair P/E ratio for an average blue chip stock can be derived by subtracting the inflation rate from a base of 18. To apply this rule, subtract the latest inflation rate of 4 percent from 18 to arrive at a target P/E of 14X earnings.
With that in mind, here are three brand names that have made it to the bargain rack:
- DuPont Co. (NYSE: DD): A diversified chemical giant, DuPont is a global enterprise with operations in 90 countries. The company has consistently been paying dividends since 1904 with a payout ratio of 46%. DD pays a 3.6% yield. The forward P/E is just 9.85.
- General Mills Inc. (NYSE: GIS): Founded in 1928, General Mills has a P/E of 13.64 and pays a dividend of 3.30%. Current earnings estimates have risen from $2.61 in 2011 to $2.83 in 2012. At 14X earnings, GIS has a relatively safe 10% upside from here — along with the promise of long-term future price appreciation. With a roll call of famous brands in the stable, GIS is going to be with us for a long time.
- Molson Coors Brewing Company (NYSE: TAP): The fifth largest brewer in the world, TAP was formed in early 2005 with the combination of Adolph Coors Co. and Molson, Inc. The company has a PEG ratio of 1.04 , a P/E of 11.36, and is trading below book value. Aside from making my favorite beverage, TAP pays a 3.0% dividend.
Keep in mind, of course, that these are investments — not trades.
After all, there is a big difference between the two, and now is the time to decide which style really fits your needs. Just be careful not to be trampled by the herd as you head in the other direction.
By the way, there have been 25 declines of 10% or more since 1962. Only nine of them turned into bear markets. In the other 16 instances, the losses were halted between 10% and 20% before the market began to move higher again… Just some food for thought.
You can find a few of the week’s best investment ideas in the Wealth Daily and Energy and Capital articles below.
Your bargain-hunting analyst,
Editor, Wealth Daily
Must-See TV: A Look at the New Frontier in Medicine
Editor Steve Christ discusses tissue engineering and explains why today’s breakthroughs will usher in a new era of medicine. What you learn could get you in on the ground floor of a fortune.
Natural Gas Amount Is Up In the Marcellus Shale: USGS Increase Prediction By 82 Trillion Cubic Feet
USGS appears to have been accurate in their measurements, so by their standards, the amount of natural gas in the Marcellus Shale is higher than predicted.
More Precious than Gold: Revolutionary Profits Ahead
Locked away since the Manhattan Project, one of the earth’s most powerful materials is going to revolutionize everything from energy to circuit boards.
Sunless Solar Power: Profit from the Fuel of the Future
It’s over 300% more efficient than rooftop panels and can generate electricity even from artificial light sources. Don’t miss the boat on this renewable energy cash cow.
My Favorite Oil Dividend Stock: Of Pickup Artists and Contrarian Investments
A pickup artist must be the exception to the rule. You must not do what everyone else does — ever. That axiom is as true for pickup artists as it is for Warren Buffett.
Hedging Gold Prices: How to Trade Gold from Here
Analyst Ian Cooper takes a realistic view of gold, and offers two ways to profit no matter what the yellow metal does
Europe’s Unfolding Crisis: Analysts Forecasting a Bad 2008 Rerun
European banks are on the verge of collapse, fear is growing, and a small handful of investors are positioning themselves for maximum profits.
One More Scumbag Gone: Winners: Italy, France, USA. Losers: China, Russia, Brazil
The post-war oil players in Libya. Plus the one you want to own.
U.S. Begs for More Nuclear: Nuclear Use to Rise Despite Japan, Uranium Crunch Looms
The reason for the commitment is simple: For all the recent news, nuclear is still our best choice for producing large amounts of round-the-clock, reliable electricity that is affordable, safe, and clean.
Third Age of Oil: Refining the Mongols
I don’t know how you want to quantify it, but the age of easy oil is over. We are now going deep offshore, under the Arctic, and into parts of the world where the rule of law is little more than wishful thinking… The third stage will happen when the cost of alternatives will be cheaper for the same product at the same price, meaning, I’m not paying 40k for an econobox that will only go 100 miles every eight hours.
Developing Our Offshore Future: Will Their Offshore Gamble Pay Off?
Keith Kohl shows readers why offshore investments are about to break wide open.
The Next Metal to Run: Beryllium Starts Making a Name for Itself
The next rare metal stock worth talking about is here. You’ll want to pay careful attention.
Should You Buy Stocks Now?: Most Investors Run for the Exits
A rare behind-the-scenes look at how one of the world’s best investors consistently beats the markets.
The Next Solar Bull Market: Buy This Solar Stock Before Friday
Editor Jeff Siegel explains why the next solar bull market is about to get underway…
Gold Nearing $1,900: Is $2,200 far Behind?
What the future holds for the yellow metal… is $2,200 far behind?