What Blue Chip Stocks Should I Invest In?

by Stewart Welch III on January 25, 2012

Readers Ask Abut Blue Chip Stocks &  Here’s what’s on their minds:
Question: “I am interested in investing about $100,000 in blue chip stocks. What are three stocks you’d recommend that pay good yearly dividends?” J.W.
Answer: First let me make a point that you’ll want to own a minimum of ten to twenty stocks in order to reduce what’s called ‘single-company risk’… the risk that the failure of one company that you own devastating your entire portfolio. A lot of people in Birmingham learned this lesson in 2008 when they refused to diversify a concentration in bank stock and saw their wealth and income devastated as bank stocks plummeted 70% or more and slashed dividends. Three blue chip stocks that we currently own for clients are Southern Company yielding 4.2%; ATT yielding 5.8%; and Kimberly Clark yielding 3.8%.
Another reader asked a similar question but wanted a recommendation for an Exchange Traded Fund (ETF). ETFs are baskets of stocks rolled into an investment product similar to an index mutual fund. You can buy and sell them like stocks. For example, iShares Dow Jones Select Dividend Index Fund (symbol DVY) is currently yielding about 3.5% and last year’s return was over 11%.
Question: “My husband and I are both age 71 and therefore must take Required Minimum Distributions from our IRA accounts. He chooses to continue working so between his paycheck and our Social Security we do not need two IRA distributions. What would you recommend we do with the money?”
Answer: You have a number of choices. Most people will simply open a personal investment account at a discount broker such as Charles Schwab or Vanguard and invest in no load mutual funds. Be sure you allocate a portion to bonds as well as stocks. An example of a mutual fund that does this for you is Vanguard Wellington (VWELX) which allocates about 34% to bonds and the balance to stocks and is yielding about 2.7%. An alternative would be to use your IRA distributions to pay down debt, if you have any or you could put it in CDs at your bank.
Question: “I am receiving a retirement from the Teacher’s Retirement System of Alabama. What percentage would you suggest I invest in stocks versus bonds for 2012?” M.D.
Answer: Generally, I’ll start this conversation with a 60% allocation to stocks; 40% to bonds then make adjustments based on the particular client facts. With this allocation, I feel you’ll receive 70% or more of the stock market return over a full market cycle (5-10 years) while experiencing about half the volatility. If you’re feeling more venturesome, you might increase your stock allocation to 70%. Except for the most worried and conservative investors, I’d have at least 30% in stocks.
And from the same reader, “Do you recommend a 529 college savings plan for my grandchild?
Yes! The gift of a good education is one of the greatest gifts you can give a family member. Alabama has a great plan and you can check it out at www.collegecounts529.com.  Be sure to use the Vanguard funds as your investment choice.
Question: “I am thinking of giving stocks to my grandson instead of presents for his birthday. He is going to be thirteen and rather than giving him something that is a throwaway gift, this could be a learning experience. Could you give some pointers particularly how it would relate to his parents tax situation? S.C.
Answer: It would take a pretty mature thirteen-year-old to get excited about receiving stocks instead of the latest game for his Xbox player so you might brace yourself for the lack of hugs and kisses. Consider choosing a stock of a company he can relate to such as Disney or Microsoft (the maker of Xbox) and you might want to receive the actual stock certificate and have it framed as a visual reminder that he ‘owns’ the company. Either you or his parents will need to be the ‘owner as custodian’ for your grandson since minors cannot own property. Any dividends paid will be reportable on his income tax return which may mean one will need to be filed for him for the first time. Most likely, no taxes will be due unless he has other income. Any unearned income in excess of $1,900 must be reported on the parents tax return with taxes paid at their tax bracket.

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Stocks Rise For A Third Week – January 2012

by Hugh Smith, CPA, CFP, CFA on January 25, 2012

Up to date in less than 2 minutes:
Last week U.S. stocks rose for a third week, the longest winning streak since October, as better-than-estimated economic data and company earnings boosted confidence in American growth. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 rose +2.4%, +2.0%, +2.8%, and +2.7%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
+2.4%
+4.1%
+7.1%
S&P 500 (Large Caps)
+2.0%
+4.6%
+2.5%
NASDAQ (Technology)
+2.8%
+7.0%
+3.6%
Russell 2000 (Small Caps)
+2.7%
+5.9%
+1.5%
Dow Jones U.S. Total Stock Market Index
+2.1%
+5.0%
+1.9%
Dow Jones Global Ex-U.S. Index (International)
+4.0%
+5.4%
-12.4%

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.04%
90 Day LIBOR
0.56%
TED Spread
0.52%
30-Year Mortgage Rate
3.95%
15-Year Mortgage Rate
3.27%
5-Year Adjustable Mortgage Rate
2.90%
30-Year Treasury Yield
3.10%
10-Year Treasury Yield
2.03%
5-Year Treasury Yield
0.89%
2-Year Treasury Yield
0.24%

 

Notable Recent Dividend Increases
Lockheed Martin (“LMT”)
33.3%
Home Depot (“HD”)
16.0%
Emerson Electric (“EMR”)
15.9%
Union Pacific Corp (“UNP”)
25.0%
McDonalds Corp (“MCD”)
14.8%
 
 
 
Now, all the details……………………
 
Last week, the S&P 500 advanced +2% to 1,315.38. The S&P 500 has gained +4.6% in 2012, the best start to a year since 1997.  The Dow gained 298.42 points, or +2.4%, to 12,720.48, reaching the highest level since July 21st. The S&P 500 rose all four days U.S. exchanges were open last week as data bolstered confidence in the American economy. Claims for jobless benefits dropped to the lowest level since 2008 and confidence among homebuilders topped forecasts. “The domestic economy is strong and that’s helped the stock market,” Mark Bronzo, who helps manage $23.4 billion at Security Global Investors in Irvington, New York, said in a Bloomberg telephone interview.  “The market’s done pretty well in the face of some good earnings news and it seems to be overcoming some of the fears around Europe.”
Technology and energy companies led rallies by nine out of 10 S&P 500 Index groups, climbing more than +2.7%.  Sears Holdings Corp. (“SHLD”) added +46% amid speculation it may go private. Bank of America Corp. (“BAC”) led Dow Jones Industrial Average gains after posting a profit. International Business Machines Corp. (“IBM”) increased +5.2% after forecasting earnings that beat analysts’ estimates.
Companies from Goldman Sachs Group Inc. (“GS”) to Union Pacific
Corp. (“UNP”) and EBay Inc. (“EBAY”) topped analysts’ income projections.  S&P 500 companies, which beat profit estimates in the previous 11 quarters, will report a +3.4% increase in per-share earnings during the September-December period, analysts’ forecasts compiled by Bloomberg show.  Of the 51 companies in the S&P 500 that reported results since January 9th, 65% posted per-share earnings that beat projections, Bloomberg data show.
Google Inc. (“GOOG”), owner of the most popular Internet search engine, slumped -6.2% to $585.99 as fourth-quarter revenue and profit missed estimates. Chief Executive Officer Larry Page is moving into new markets to ignite growth outside Google’s traditional search-based business.  That effort contributed to an -8% drop in the average price Google gets when users click an ad, because it charges less for ads on mobile devices and in emerging markets, said Herman Leung, an analyst at Susquehanna Financial Group.
Carnival Corp. (“CCL”) tumbled -7.9% to $31.56.  The company owns the Costa Concordia cruise ship that ran aground off the coast of Italy last week, killing at least 11 people.  Carnival halted advertising for its Carnival Cruise Lines and announced a review of safety procedures in the aftermath of the accident.
Last week, the Dow Jones Global Ex-U.S. Index (broad international index) rose +4.0%. The Americas were up +2.3% with Brazil up +5.4%, Canada up +1.4%, and Mexico up +2.3%. Europe was up +2.7% with Germany up +4.3%, France up +3.9%, and Spain up +1.3%. Asia-Pacific was up +3.1% with Australia up +1.0%, China up +3.3%, Hong Kong up +4.7%, India up +3.6%, Japan up +3.1%, and Taiwan up +0.7%.
Treasuries dropped in price with the 10 year yield rising on the week to 2.03% from 1.86% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 862, down from the week earlier closing level of 1,053. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 52 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil dropped -0.2% and closed at $98.46 per barrel. Year to date, oil is down -0.4%. The average price of unleaded gasoline dropped -0.1% last week to end at $3.383 per gallon per January 22nd data provided by AAA. Year to date, unleaded gasoline is up +3.2%. Natural gas was down -12.3% last week and closed at $2.343/MMBtu. Year to date, natural gas is down -21.6%.
Last week, gold rose +2.0% closing at $1,663.70 per troy ounce. Year to date, gold is up +6.3%. Last week the dollar was down -1.6% as measured by the U.S. Dollar Index with that index closing at 80.223. Year to date, the U.S. Dollar is up +0.1% as measured by the Dollar Index. Last week the Euro was up +0.9% against the U.S. dollar closing at $1.2909/Euro. Year to date, the Euro is down -0.2% against the U.S. Dollar.
Look for a slew of earnings in the coming week from the likes of McDonald’s (“MCD”), Regions Financial (“RF”), Kimberly Clark (“KMB”), Apple (“AAPL”), United Technologies (“UTX”), and Lockheed Martin (“LMT”). Look for economic reports this week on 4th quarter 2011 GDP, housing prices, durable goods orders, Fed rate decision (expected no change here), new home sales, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

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Economic Predictions for 2012

January 25, 2012

This past year included a lot of excitement but not much progress from an economic or stock market perspective. Extraordinary events included the near shut-down of our government; the downgrading of U.S. treasuries from AAA status; the near default of Greece; as well as a highly volatile stock market that could rise or fall several hundred [...]

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What Should You Do With $1,000?

January 25, 2012

With the holiday season finally behind us and the year of 2012 dead ahead, a reader asked me, “Stewart, What would you suggest I do with a $1,000?” You may have year-end bonus money, be expecting a tax refund or simply just have a few bucks burning a hole in your pocket. To get a broad spectrum [...]

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5 Steps for Success in 2012

January 25, 2012

Since the Great Recession began in 2008, millions of Americans have been affected by the financial tsunami that has now swept across much of the world. As we consider our fate for the coming year it’s important to differentiate between ‘the’ economy and ‘our’ economy. There is very little that we can do regarding the U.S. or [...]

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Tis the Season of Giving

December 21, 2011

No doubt about it, December has everyone in the giving mood. People are busy buying and exchanging gifts, acknowledging friendships and the love of family members. Giving can also be smart tax planning while providing much needed support for those less fortunate in our community. Here’s a summary of the most popular ways people give and get a [...]

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Stocks Drop, Europe Continues to be Drag

December 21, 2011

Up to date in less than 2 minutes: Last week U.S. stocks fell as European leaders struggled to solve the region’s debt crisis and the Federal Reserve refrained from additional stimulus. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all dropped -2.6%, -2.8%, -3.5%, and -3.1%, respectively.     Equity Performance Table Last [...]

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Are Bonds More Risky than US Stocks & Is Bernanke In Trouble?

December 13, 2011

Here are three questions from our readers: Question: Are investment grade bonds riskier than the stock market? V. F. This reader commented, “As we all know the stock market has both gyrated and gone sideways in the last decade. Yet when I seek to invest in A to BBB corporate bonds I am asked if [...]

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Stocks Rebound to Best Week Since March 2009

December 5, 2011

Up to date in less than 2 minutes: Last week U.S. stocks rose, sending the Standard & Poor’s 500 Index to its biggest weekly rally since March 2009, after central banks took action to ease Europe’s debt crisis and American Thanksgiving retail sales set a record. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all [...]

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Banks: Too Big to Fail Again …

December 5, 2011

It reads like a 29,000 page conspiracy theorist novel and it took two years and the Freedom of Information Act to discover that the Federal Reserve, led by Ben Bernanke, secretly loaned the big banks more than $1.2 trillion in bail-out money on December 5, 2008.  This secret lending ballooned to as much as $7.7 trillion [...]

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