Stocks to Sock Away
In the lazy days of August, when many of us would rather work on a tan than a portfolio, it's a good time to take a look at some stocks to buy and not worry about, at least for a while. Indeed, everyone could use a break from the constant economic data, debates about where interest rates are headed, and agonizing over whether you should wait for that beaten-down tech stock to recover. In other words, take some time to think and plan for the long term, because patience can pay off.
Some things to look for in a long-term holding include dividends and strong brands or revenue-generating products that we can't live without and are hard to duplicate. Josh Peters, an equities strategist with Morningstar who says he buys stocks planning to hold them for an "indefinite" period, says dividend investors should look at companies in terms of "how shareholder-friendly they are," putting more value on cash-generating dividends than share buybacks.
This Five for the Money presents stocks to sock away. Remember, though, even the highest-quality names can have dark days and might need to be reconsidered.
1. Coca-Cola (KO)
It's not the best of times for the world's largest soft-drink company. Sugary drinks are under fire for causing obesity, and Coke's 2005 net income of $4.872 billion barely topped 2004 results. And with the stock trading flat for the last five years, arch rival PepsiCo (PEP) surpassed it in market cap.
Even so, Coca-Cola might be worth a look for investors uninterested in tinkering with their holdings. The company consistently raises dividends and boasts one of the world's strongest brands. Coca-Cola says it wants to emphasize diversification into drinks beyond cola (see BusinessWeek, 8/7/06, "Queen of Pop"). The company is well-positioned for soul searching—in 2005, Coke says its brands accounted for 2.6% of the "50 billion beverage servings of all types consumed worldwide every day."
2. Realty Income (O)
This real estate investment trust (REIT), which has an unusual business model, is a dream for dividend investors, says Morningstar's Peters. REITs are tax-advantaged entities that enable investors to put their funds in a pool overseen by a management company. It's a way to invest in real estate that sidesteps many of the difficulties of buying and managing property.
Realty Income specializes in retail properties for which it offers "triple net" leases where the tenant covers property taxes, insurance, and other expenses, according to an August report co-authored by Peters. And its dividend yield is a whopping 6%.
Real estate can be a risky game, but Peters praises the company's conservative investments and strong record of collecting rent. "What can you say about a company that calls itself the 'monthly dividend company'?" Peters asks, noting favorably that the group's managers frequently "invoke the needs of the little old lady in Dubuque."
3. Microsoft (MSFT)
The software giant hasn't wowed Wall Street in recent years, with the stock floundering in the $20 to $30 range (see BusinessWeek, 5/15/06, "Mixed Signals from Microsoft"). But through consistent dividends and return on research and development investments, it could ultimately reward patient investors.
Standard & Poor's analyst Scott Kessler says the company "seems very focused on delivering shareholder value" through buybacks and dividend payments. It also continues to generate mountains of cash through its Windows and Office software products as it looks to grow in other areas.
As an investment, Microsoft also has detractors, especially those skeptical of its foray into digital music and attempt to increase its presence in Internet search against rivals such as Google (GOOG). Though Kessler has a strong buy recommendation on the stock, he's taking a wait-and-see approach in some of the areas where the company is "more of an upstart." In particular, he's wary of Zune, a portable device aimed at Apple's (AAPL) iPod, which he says is "well ahead of them."
4. Microchip Technology (MCHP)
You may not have heard of microcontrollers, but they're everywhere. S&P describes a microcontroller as "a self-contained computer on a chip," with processing and data-storage capacities present in machines and devices ranging from cars to appliances.
Microchip Technology could be a smart play for long-term investors, as it has evolved into a tech company that's serious about dividends (see BusinessWeek.com, 1/24/06, "Analysts' Picks: Tech Stocks"). The company has raised its dividend since it started paying a 2-cent quarterly dividend in 2002. Its quarterly dividend is now 23.5 cents, giving it an annual yield of 2.9%.
In a recent report, S&P says it expects Microchip to gain market share and improve its gross margins in fiscal 2007, even as the microcontroller sector expands. This is reflected in an earnings-per-share (EPS) estimate of $1.51, up from $1.13 in fiscal 2006. S&P gives the stock a 12-month target price of $46, up 37% from the Aug. 16 closing price of $33.50.
5. Johnson & Johnson (JNJ)
Investors might want to pick up some of this safe-haven stock and stash it in a drawer. Like many big pharmaceutical companies, J&J pays a sizeable dividend—it sports a yield of 2.3% and has increased its dividend for 44 consecutive years.
However, the company offers other incentives for investors to stick around. Heather Brilliant, an analyst with Morningstar, gives the stock a fair value of $76, almost 18% upside from its Aug. 16 close of $64.61.
With its pharmaceutical, consumer, and medical-device products, a recent Morningstar report says, the company has a "pristine" balance sheet. Brilliant especially likes the drug division, which has a fat late-stage pipeline including treatments for HIV/AIDS and certain cancers.
"One of the positives of their pipeline is that it's not overly reliant on one or two products," Brilliant says. That can work as a hedge in the face of the unpredictable drug approval process. Considering this and the company's other big consumer brands, such as Band-Aid and Tylenol, this stock could rest easy in a portfolio for years to come.