Catching the Bull's Next Move

In 2004, S&P thinks larger, higher-quality stocks will lead the rally. Here are nine such picks with promise

By Michael Kaye, CFA

Many market watchers feel that in 2004, companies with consistent earnings and dividend payouts will outperform the broader market. That wasn't the case in 2003. While the average dividend-paying stock in the S&P 500-stock index rose 33.5% -- certainly a nice number -- the average nonpayer rose 61.7%.

That appears to be typical of the first year of a bull market. As Joseph Lisanti, editor of S&P's weekly investing newsletter, The Outlook, points out, it's partly because in the first year of a market advance, smaller, more speculative stocks (which usually don't pay dividends) tend to outperform the larger, higher-quality issues. Generally, the larger issues start to perform better and the smaller ones rise a bit more slowly in the second year of a bull market.


  So where can investors find the companies with the best earnings and dividend track records to take advantage of such a pattern? That's where S&P's quality rankings -- which measure a company's long-term dividend and earnings performance -- come in. In this week's screen, we searched for issues that carry S&P's highest quality rank of A+, which means they have compiled a 10-year record of superior earnings, dividend growth, and stability.

The stocks in this week's screen also had to have top marks in one other category. We looked for issues that carry S&P's highest investment recommendation, 5 STARS (buy). That means S&P equity analysts expect them to outperform the overall market over the next 6 to 12 months.

When we ran the numbers, these nine names emerged:

Top choices for the bull's second year
Company/ticker S&P STARS Rank S&P Earnings & Divd. Rank
Anheuser-Busch (BUD ) 5 A+
Automatic Data Processing (ADP ) 5 A+
Capital One (COF ) 5 A+
Cardinal Health (CAH ) 5 A+
Citigroup (C ) 5 A+
Compass Bancshares (CBSS ) 5 A+
MBNA (KRB ) 5 A+
Omnicom Group (OMC ) 5 A+
Sysco (SYY ) 5 A+

Kaye is a portfolio services analyst for Standard & Poor's

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