The past month has been marked with volatility and a steep selloff in stocks on a global scale. The unprecedented downgrade of U.S. government debt from Standard & Poor’s, the high unemployment and the slowdown in the U.S. economy all caused investors to be bearish on equities. As stocks keep on falling, however, companies keep on generating positive earnings surprises. Despite all the bearish news, I believe now is the perfect time to start accumulating stocks.
In an environment where everyone is inflating the gold bubble and the U.S. Treasury bubble, stocks are being overlooked by investors. The “lost decade” has burned many U.S. investors, who saw stagnating stock prices since the early 2000s. That being said, stock prices could go lower, thus making stocks an even better investment at lower valuations for smart long-term investors.
For the four quarters ending June 30, 2011, the S&P 500 Index, which is my benchmark, has “earned” $83.87. The dividends paid to S&P 500 investors amounted to $24.34, while operating earnings amounted to $90.90. Based on the current S&P 500 price of $1,154, the index is trading at a P/E ratio of 13.76 and yields 2.1%.
The average P/E ratio has been 20.8 times earnings since 1977. Based on that information, stocks are at their cheapest valuations in years. In addition, since 1871, P/E ratios on the S&P 500 have averaged 15 times earnings.
Analysts are estimating that S&P 500 companies will generate operating earnings of $98 in 2011, followed by an increase in operating earnings to $112 in 2012. It looks as if investors are discounting that these increases will be much lower. However, even if earnings stagnate for several years, companies will generate a sufficient amount of earnings in 14 years, which is equal to today’s S&P 500 prices.
Investors should not overlook the fact that most of the stocks with the highest weightings in the S&P 500 are global multinationals, which generate a high amount of their revenues and earnings from international operations. In a previous study, I found out that international operations account for almost half of revenues for the top 10 companies in the S&P 500.
The types of companies I am looking to invest in are blue-chip dividend growth stocks that have long histories of increasing dividends. The types of dividend stocks I am looking to buy on any further weakness include:
PepsiCo (NYSE:PEP) engages in the manufacture, marketing and sale of foods, snacks and carbonated and noncarbonated beverages worldwide. This dividend aristocrat has managed to hike dividends for 39 years in a row. The company has increased dividends at an annual rate of 13% during the past decade. Analysts are expecting earnings growth of 13.8% in 2011 and 9% in 2012. Yield: 3.3% (analysis)
Colgate-Palmolive (NYSE:CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend champion has raised dividends for 48 years in a row. The company has increased dividends at an annual rate of 12.4% during the past decade. Analysts expect the company to grow EPS by 17.6% in 2011 and 9.9% in 2012. Yield: 2.5% (analysis)
Abbott Laboratories (NYSE:ABT) engages in the discovery, development, manufacture and sale of health care products worldwide. This dividend aristocrat has raised dividends for 39 years in a row. The company has increased dividends at an annual rate of 8.8% during the past decade. Analysts expect the company to grow EPS by 56.7% in 2011 and 7.5% in 2012. Yield: 3.7% (analysis)
Unilever PLC (NYSE:UL) provides fast-moving consumer goods in Asia, Africa, Europe and the Americas. This international dividend achiever has raised dividends for more than a decade. The company has increased dividends at an annual rate of 9.2% during the past decade. Analysts expect the company to grow EPS by 21.6% in 2011 and 8.5% in 2012. Yield: 3.9% (analysis)
Chevron (NYSE:CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation and energy operations worldwide. This dividend achiever has raised dividends for 24 years in a row. The company has increased dividends at an annual rate of 8.1% during the past decade. Analysts expect the company to grow EPS by 43.4% in 2011 and a 2% decrease in 2012. Yield: 3.1% (analysis)
These sleep-well-at-night stocks should provide a rising dividend income stream to investors as well as the potential for capital appreciation.
For more information, visit DividendGrowthInvestor.com.
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