Is It Time To Get In On Blue Chip Dividend Plays?

Published Wed, 11 July 2012 09:00 CET by

The blue chip Dow stocks led last falls rally, beating out the S&P 500 and the Nasdaq by several percentage points. The safety and dividends offered by the worlds largest companies were an attractive haven for investors growing wary of impending global slowdown. When comparing the major indexes by dividend yield, it is easy to see why the Dow performed better than its counterparts. 100% of the Dow stocks pay a dividend with an average yield of around 3% and a range of 1-5%. Of the S&P 500, about 81% of stocks pay dividends with an average yield near 2% and the dividend yields are even lower on the Nasdaq.

Average Dividend Yield S&P 500 Table
This year is shaping up to be much like last, with concern over world growth and weak corporate outlooks weighing heavily on the markets. Reduced earnings and diminishing expectations of accelerated growth in the second half give little reason for the general markets to move higher. With little expectations for a second half bull market, dividends will emerge as an important factor for investors. Is now the time to get in?

Alcoa (NYSE: AA), often viewed as an economic bell-weather, kicked off the second quarter earnings season earlier this week. The company reported an 81% drop in earnings over the previous quarter, beating the streets estimates but yet still stunning investors. The stock dropped about 3% following the announcement and could continue its decline. The company stated that falling aluminum prices, over supply and a rapidly slowing world economy, especially in China, will curb revenue and profitability in the second half.

Alcoa Stock Price Chart
The stock is approaching the lows it set following the 2008 market sell-off. The stock has lost over 46% in the last year and 2.5% in the year-to-date period but still has another 40% fall from the current level before reaching that point. Will it fall that far? No, probably not. The bearish momentum in the stock is declining and it is oversold, trading near a more recent support zone. The stock currently yields about 1.4% and could increase to over 2% should Alcoa continue down to its long term support.

McDonald's (NYSE: MCD) is another Dow dividend play that has benefited from a weakening global outlook. The stock has moved down over 10% for the year based on slowing sales growth and weak global outlook. The company has been able to sustain growth this year in line with expectations. Global comparable sales, which fell from 7.5% in April to 3.5% in May and June, remain positive and at a rate comparable to last years average of 5.5%. The company has reported sales growth in the US, Asia and Europe with Asia lagging at 1.7%. Unfortunately for the share price, McDonald's could be suffering from misplaced bearishness because the company has a proven track record of growth and dividend increases. Alcoa, whose dividend has increased due to lower stock prices, has not increased its dividend since 2002.

McDonald's Stock Price Chart
McDonald's is scheduled to release second quarter earnings July 23 and could surprise the markets. The current expectations are for earnings per share in the range of $1.38, compared to an actual EPS for the same period last year of $1.35 and the previous quarter this year of $1.23. The stock is currently trading under resistance and could move lower on global economic news prior to the release. At the current level, near $90, the stock yields around 3.1%, a number that could increase to as much as 3.5% if the stock moves down to it's next support zone around $80.

The blue chips as a whole are a good place for dividend returns, but not all are equal. Investors should not focus too heavily on individual quarterly earnings but should look to long term trends in revenue and earnings for clues. Sustained growth of revenues and earnings trump cyclical growth and fit better in long term investment strategies. Alcoa will surely bounce back when the world economy turns, but when that will be is still in question. McDonald's is head and shoulders above Alcoa in this light and makes a better long term dividend investment. Waiting until after earnings season could be a prudent move and could provide a better yield.

Stock name Dividend Yield
Mcdonalds 3.20
Alcoa 1.33

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