Earnings gave the market a bit of spring in its step last week, with the broader market gaining about 3.5%. But let’s not forget that volatility has plagued the market all year. Before marking up share prices significantly – and staying there – Wall Street will need to hear a lot more good news than we’ve had lately.
That’s not to say I’m pessimistic. If business activity keeps chugging along, as I believe it will, stock prices will bounce back. However, the recovery process will likely take several months. Investor psychology has been wounded, and right now it pays to err on the side of caution.
Indeed, it wouldn’t surprise me at all if the blue chip stock indexes were to retest their July 2 lows (that’s about 9,686 for the Dow and 1,022 for the S&P) and perhaps undercut them by a couple of percentage points sometime in the next four to 10 weeks.
So how do you manage through this rough patch? By doing a bit of tactical trading around the edges of your portfolio, pruning the riskier stocks and finding shelter in stable
companies that offer lush dividends. Not only will this allow you to ride out the volatility, it will ensure you see some payback even if your shares move sideways.
Here are three of my favorite low-risk, high-dividend stocks for August:
One of the highest-yield investments I’m watching is the Canadian oil-and-gas royalty trust Enerplus Resources (NYSE:ERF). As the name implies, ERF earns income from a portfolio of producing oil and gas properties, mostly in western Canada but also in North Dakota, Montana and the Marcellus Shale region of Pennsylvania and West Virginia. The trust pays monthly distributions, which currently work out to an annualized yield of 9.1%.With oil-and-gas investments, you’re exposed to fluctuating commodity prices. That’s a fact of life. However, ERF does its best to mitigate that risk by maintaining one of the strongest balance sheets in the royalty space (debt amounts to only 0.7X annual cash flow). In addition, Enerplus carries on an active exploration and acquisition program to replace the oil and gas it pumps out of the ground. Currently, the trust estimates it has enough proven and probable reserves to cover almost 11 years of production—a very conservative profile.
Taxes? There’s a 15% Canadian withholding tax on your distributions, but you can recoup it on your 1040 if you hold ERF in a taxable account. Pay up to $23.
A great dividend stock to buy on dips is Raytheon (NYSE: RTN). This company is one of the best-positioned defense contractors, having slashed debt in recent years and beefed up its intelligence, surveillance, reconnaissance and homeland-security businesses. Earnings, which grew steadily through the recession, should hit a record $5 per share in 2010. Yet the stock is trading at less than 10X this year’s estimated net, with a dividend yield north of 3% right now.Obviously, the dawning of world peace would hurt this company. But I think it’s wise to own some defense stocks (especially those that pay good dividends) as a cheap hedge against the opposite scenario. I advise you buy RTN on a pullback to $47 or less.
Also on my radar as a stock with little downside and a nice dividend yield is Johnson & Johnson(NYSE: JNJ). The healthcare giant has made some unhappy headlines lately with its serial recalls of Tylenol, Motrin and several other over-the-counter meds. However, I’m old enough to remember the massive Tylenol recall of 1982. It didn’t hurt JNJ’s reputation for long—and, in fact, my subscribers made a small fortune buying the stock during the panic.I think we’ve got a similar situation on our hands this time. JNJ is a widely diversified company. (Consumer goods like Tylenol and baby powder account for only 26% of sales, with prescription drugs and medical devices making up 83% of JNJ’s operating profits.) What’s more, the recall brouhaha has left the shares dirt cheap at less than half the price-earnings ratio JNJ fetched a decade ago. On top of that, the stock throws off a plump 3.8% dividend.
Remember, too, this is one of the world’s strongest and safest businesses, meaning your downside risk is greatly reduced. JNJ boasts a triple-A credit rating from Standard & Poor’s, a distinction shared by only three other U.S. industrial firms. The dividend, last raised at the end of April, has been sweetened 48 years in a row. Buy JNJ under $65.
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