July 13, 2012
Written By Chloe Lutts Jensen
It’s been a rough few months for risk-averse investors. Since the first-quarter rally failed in early April, the market has developed no obvious overall trend, instead chopping up and down from month to month like a particularly unpredictable yo-yo. It’s the kind of action that makes you want to buy something really boring, like Treasury bonds, just so you don’t have to watch them jump up and down.
Unfortunately, Treasuries yield next to (and sometimes less than) nothing today. What’s a risk-averse income investor to do?
Stephen Leeb and Genia Turanova proposed a good idea in the latest issue of Leeb’s Income Performance: non-cyclical consumer stocks. Here’s what they wrote:
“Last issue, we added the stocks of two companies that belong to the so-called ‘non-cyclical’ category of equities. Such stocks generally are more stable during the market’s ups and downs because their profits are less volatile than those of their cyclical counterparts. That, in turn, is based on the greater stability of their businesses, which generally offer goods and services that are needed in times of boom and bust alike.”
Leeb identified consumer staples and health care as good places to look for non-cyclical stocks. Conveniently for income investors, blue-chip-type companies in these industries often pay very nice dividends. Below are three options for generating income from non-cyclical consumer staples stocks:
Unilever PLC (UL), which currently yields about 3.7%, was recommended in the latest Dividend Digest by Richard C. Young, editor of Richard C. Young’s Intelligence Report. He wrote:
“The products Unilever PLC (UL) sells are necessary to make people’s lives easier. With Europe staring down the barrel of a double-dip recession and China fearing a hard landing, it pays to focus on companies with the power to withstand weakness in the markets. Unilever is home to a catalogue of consumer brands that customers will continue to buy, in and out of recession. American consumers are aware of some of Unilever’s great brands, like Hellmann’s, Slim-Fast, Lipton, Wish-Bone, Ben & Jerry’s, Axe, Dove, Lifebuoy, Pond’s and Vaseline. But Unilever’s brands are popular around the world, too. Home care brands like Domestos, a bleach that is number-one or -two in its market in nine countries, and Sunlight Soap, a dish detergent that is the leading brand in 20 countries, are just two stars in Unilever’s brand constellation. CEO Paul Polman has nimbly implemented efficient policy at Unilever since he took over in January of 2009. … Buy Unilever shares today.”
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Here’s what Dick Davis Dividend Digest readers received over the past month:
- An above-average 3.9% yield from a consumer products company that is
not only recession-proof–it’s got the top dish detergent in 20 countries–but that has found renewed efficiencies under a CEO who came on board in 2009.
- A big 4.0% yield from a global chemical company that is not only on the cutting edge of plastics development but is also reaping the benefits of a huge and growing fertilizer business.
- A rock-solid 3.8% yield from a conservatively-managed Kentucky-based
bank that not only has a gross margin that’s five percentage points higher than the industry average but also has an operating margin of 30.0% vs. the industry average of 23.9%.
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Our other non-cyclical also has great exposure to emerging market consumers. Here’s what Stephen Mauzy, editor of Wyatt Investment Research’s High Yield Wealth, wrote about it in the Investment Digest last month:
“I see little to dislike about spice and seasoning maker McCormick & Company, Inc. (MKC). For one, the company dominates its market niche like few companies do. In many geographic regions, McCormick’s spices–which include Lawry’s–account for 60% of total spice sales. What’s more, the company has aggressively moved into new markets, making substantial investments in Eastern Europe and India. Management expects emerging markets to become an important growth driver, eventually accounting for 20% of sales by 2015.
“McCormick has been a solid performer. Its share price is up 11.5% year-to-date. It has returned 17.5% since being added to the High Yield Wealth portfolio in June 2011. McCormick is also one of the least volatile stocks in the portfolio, with a beta of a mere 0.35. In the long term, McCormick’s management targets annual average revenue growth of 6%, which, through cost cutting and economies of scale, should translate into at least 9% EPS growth. Along with a commitment to annual dividend increases, management’s financial objectives should lead to a double-digit increase in total shareholder return for McCormick investors. That’s the kind of return many McCormick investors have enjoyed over the past decade. Suggested Action: Buy McCormick & Company shares.”
After a run-up in the share price this year, MKC currently yields about 2%, but the company’s commitment to annual dividend increases (it became a dividend aristocrat this year) mean that yield will continue to grow.
Finally, I’ll add the Consumer Staples Select Sector SPDR (XLP) as another option for buying into the broad non-cyclical consumer staples market. The ETF currently yields 2.6%, and holds companies like Procter & Gamble (PG), Philip Morris (PM), Wal-Mart (WMT) and Colgate-Palmolive (CL).
Wishing you success in your investing and beyond,
Editor of Investment of the Week
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