Last year at this time I was constructive on the market, despite many headwinds and the ongoing turmoil in Europe. Valuations and dividends were fairly attractive and they still are. Despite the volatility, the market ended 2012, having posted yet another positive year since the market began this current bull run, which started in March 2009. For 2012, the Dow Jones Industrial Average finished up approximately 7 percent, plus dividends, and the S&P 500 posted a much stronger 16 percent return. Last year’s California Top 5 (Granite Construction, Charles Schwab, Chevron, Mercury General and Mattel) returned an average of 17 percent plus dividends. It was an excellent year for most investors.
My outlook for 2013 is similar to last year, but with fewer obstacles in sight, the market should hopefully be driven by improved earnings (rather than headlines) and an ongoing steady, albeit slow, economic recovery. Housing is looking decent again and despite having rallied over 100 percent since the collapse in 2008-’09, stocks are still reasonably priced thanks to earnings growth.
While I don’t expect double-digit returns this year, it wouldn’t surprise me to see global stocks, including our domestic market, surprise to the upside yet again, as more and more investors jump on board an aging bull market. Indeed, at some point, if valuations become stretched and public and institutional investors turn more bullish (becoming more fully invested), I will more than likely begin reducing equity exposure for clients.
Still, for the time being I continue to see decent upside in stocks and remain fully invested for my discretionary accounts. Bond yields are also improving a bit, which is a positive sign for conservative investors in need of fixed income, but bonds are still not a compelling value, making dividend stocks an attractive alternative for income investors.
For 2013, my expanded list of candidates includes all publicly-traded companies based in California. I am sticking with Charles Schwab and Chevron once again this year, but I have added three new selections for your interest. The following choices should be considered as candidates to add to an existing portfolio – not as a stand-alone portfolio:
Charles Schwab (SCHW): Recent Price $14.4, Dividend Yield 2 percent: Schwab is the largest retail discount brokerage firm in the U.S. It has approximately 13,000 employees and is based in San Francisco. Company revenues look to improve in 2013 after experiencing heavy declines during the past recession. Obviously Schwab’s fortunes are directly tied to stock market and economic performance since it relies on investment activity to propel earnings. The long-term prospects for the company are solid and it continues to be an interesting turnaround play.
While the company is not a “blue-chip” in the sense of predictable earnings and price stability, it is a solid brand name with a huge client base. Unfortunately, the dividend has not been raised since 2008, but that may well change given the company’s cash position. The stock price has been hammered since late 2008, but now appears on an upward trend. If you like the prospects for a continued recovery in the stock market and the economy, Schwab could be a profitable play. Not for the timid, Schwab is also a fairly volatile stock. Still, for the aggressive-minded income investor, this could be a rewarding choice once again in 2013.
Chevron (CVX): Recent Price $106, Dividend Yield 3.5 percent: The fourth-largest oil company in the world has been a solid performer for many years. Its stock price has generally been on a steady upward trajectory during the past decade. No, I don’t expect returns anywhere close to what we have seen over the past couple of years, as earnings doubled, but I do like the company as an attractive play on an improving global economy.
In addition, the growing dividend of $3.51 annually per share provides income investors with cash flow. Indeed, dividends have been hiked 9 percent annually in recent years which is terrific for investors. The company earns high marks for price stability and has a very healthy balance sheet with $21 billion in cash and manageable long-term debt.
The risk here, as with all major oil companies, is a large decline in demand and the price of oil – this would not bode well for Chevron. Still, with a stellar balance sheet and a gradually improving global economy, this could be an attractive holding for moderate to conservative income investors. I would not look for outperformance from this stock, but it should hopefully keep pace with the overall market and provide plenty of income too.
Clorox (CLX): Recent Price $74, Dividend Yield 3.5 percent: This leading home care and professional products company is looking to post record earnings per share in 2013. In addition, the Board has consistently rewarded shareholders with increased dividends for nearly 30 years. The annual yield is 3.5 percent and the $2.48 per share payout will more than likely be raised an additional 15 cents in 2013. The annual dividend increases assure investors of healthy earnings and sound management, despite a fluctuating economy.
Most of the company’s overseas activities are in Latin America where there is risk of currency devaluation. The company receives 22 percent of total sales from abroad. Clorox is a rather unexciting pick, but has given investors fairly consistent returns without extreme volatility – it receives high grades for price stability and should appeal to more conservative income investors. I see the potential returns for this stock (same outlook for the above-listed Chevron) set to mirror the overall market, but with higher income from the attractive dividend. If food and consumer products companies continue to attract investors, it may well outperform.
Intel (INTC): Recent Price $20.6, Dividend Yield 4.3 percent: Intel is a leading manufacturer of integrated circuits with its primary market in personal computers (its chips can be found in approximately 80 percent of all personal computers). It has been a perennial underperformer, but the stock has reached levels where I think it warrants consideration. Indeed, it was recently trading near $30 and seems to have found support around $20. Its dividend has been raised consistently over the years and the company now yields over 4 percent (unheard of for a technology company). I am cautiously optimistic about Intel for 2013 and view this holding as an attractive purchase near $20 without too much downside risk. It has an A++ balance sheet with $10 billion in cash and little long-term debt.
Wells Fargo (WFC): Recent Price $34.2, Dividend Yield 2.5 percent: Wells Fargo needs no introduction as it boasts over 11,000 offices and 267,000 employees. The company recorded record earnings in 2012 and it hopes to continue the trend in 2013. This large bank holding has excellent credit quality and a respected reputation. The share price hasn’t done much over the past decade, but the dividend payout, which was slashed in 2009, is now on the rise. The stock trades at a PE multiple of 10, which is a very reasonable, below-market multiple. I would rate this holding as one of the best of the nation’s leading banks with limited downside and plenty of upside – assuming the economy takes hold and its assets and loan portfolios continue to grow. The improving dividend will also hopefully return to pre-crash levels within the next couple of years.
At the time of print publication, Stuart Chaussee and/or his clients hold positions in Chevron, Clorox and Wells Fargo, which are selections in the California Top 5 for 2013. Holdings can change at any time. Under no circumstances does the information in this column represent investment advice or a recommendation to buy or sell securities.