Stocks With Good Dividends

| December 19, 2008 | 0 Comments

This week the Federal Reserve made history.  They lowered interest rates to levels never before seen.  Right now the target Fed Funds Rate is a range of 0.0% to 0.25%.  It was an amazing announcement.  In addition to lowering the rates, the Fed also announced plans to actively buy agency debt and other mortgage backed securities.

In my mind it wasn’t the rate cut that had the biggest impact.

The news of the Fed actively buying debt caused long term interest rates to fall.  Short term government debt now has a yield of close to 0%.  The prospect of low mortgage rates caused the market to rally big time.  I guess the thought of a real estate feeding frenzy (due to low rates) is a positive thing these days.

Now, the market rallied big on the news.  It might be a bear market rally… or it might not.  Only time will tell.

Here’s the thing… despite the crazy markets I’ve been selectively buying good quality stocks.  I thought you’d be interested in what I’m buying. My focus right now is on long term investments.  Investments I could hold for 10, 20, or 30 years.  I know that seems like a long time (and it is).

I started focusing on solid well known companies that were profitable and paying dividends.  I figure if I’m going to hold something that long, I might as well get paid to do it… right?  The easiest way to get paid is through dividends.

But dividend yields can be a big trap.  The yields on some stocks are huge. I found some dividend yields of more than 25%.  But they’re big for a reason, many investors expect these companies to cut their dividends at some point in the future.

It’s a risk I’m willing to take.  But one I hope to mitigate by investing in well known, well run companies.

Was my timing perfect?  Probably not.  I started making a few purchases in late October.  You can imagine the feeling I had when the market kept dropping into November.  Now, we’re back up above where I made my purchases… and I think heading much higher.

Around that time, I bought a handful of different stocks.  Instead of just listing all of them, I thought I’d pick one and explain why I liked it.

So here it goes.

One of the first companies I picked was Home Depot (HD).  Yes the same big box retail store sitting in every city in America.  The same place you can buy a Christmas tree, a hand saw, a box of wood screws, and all the lumber you can haul.

I know what you’re thinking…. Is he crazy?  With the horrible housing market why buy this now?

Everyone knows the housing market’s in the dumps. Home values are down.  Foreclosures are up.  And with the soft economy, people don’t have the money to fix up their homes right now. I get it.

Here’s the thing.  It won’t stay like this forever.  Not every home is going to crumble into dust.  At some point in the next few years the housing market will stabilize.  Then it will start to slowly grow.  All those little repair jobs around the house will start getting done.

Roofs will get fixed, drips will get repaired, new carpet will be installed, and plumbing fixtures will be updated.  Homes with deferred maintenance will start to receive the care and attention they need.

It won’t happen right away, but when it does, Home Depot will be there to sell homeowners everything they need.

Remember, Home Depot isn’t some fly by night start-up.

They’re the largest chain of home improvement stores in the nation. They have stores in all 50 states and parts of Canada, Mexico, and China.  Just how big is Home Depot?

For the 9 months ended October 2008 they did more than $56.6 billion in sales.  They generated more than $4.0 billion in operating income, and net earnings of more than $2.3 billion.  That’s more than $1.37 per share in earnings.

Not bad numbers for such a horrible economic environment.

Now, analysts on the street are cutting back earnings estimates on the company.  As a matter of fact, the company has seen a number of revisions downward in their growth rate… but what do you expect when the entire country is in a recession.

Amazingly of the 19 analysts who cover the stock, only 6 rate it a buy. Great news.  As the company performs, these analysts will no doubt increase their rating.  This will drive institutional investors back into the stock, causing the price to rise.

Now, I’m not expecting the stock to rocket higher any time soon.  I think it will be a gradual buildup over time.  I’ve got no problem with slow and steady, because of the dividend.

Recently the Board of Directors announced a dividend of $0.225 per share.

Annualized, the dividend works out to $0.90 per share.  Right now that represents a yield of 3.6%.  Much better than the current 0% yield you can get on short term government securities.

But that’s not all.  Over the last 5 years the company’s average yield was 1.3%.  If things were to return to normal (the 5 year average) the value of this stock could jump by 270%.

Plus we get the juicy dividend!

I nibbled a little when the stock was under $20 a share.  Today it’s up to just over $24.  That’s a nice 20% gain in the worst market environment in decades.  I’m not going to sell and take a quick gain.  Nope, I’m looking at this for the long term… and for that dividend.

I think we have a long way still to go on this stock.  If I’m right, now might be the buying opportunity of the decade for Home Depot.  Think about it for your own portfolio.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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