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1st choice mortgage
Generous dividends
Generous dividends Stocks such as ConAgra and Newell Rubbermaid offer high yields and attractive long-term growth. February 28, 2005: 1:22 PM EST By Michael Sivy, CNN/Money contributing columnist NEW YORK (CNN/Money) - No one can deny that the economy is performing well. Real gross domestic product has grown at least 3 percent in each of the past two years, and the consensus forecast calls for several more years at that rate or better. Moreover, this past Friday estimated real GDP for the fourth quarter was revised upward to a 3.8 percent annual rate. These numbers ought to be cause for celebration, but stockholders today are anything but upbeat. The uncertain world political situation, the high price of oil, and fears of higher inflation and rising interest rates have made investors increasingly cautious. One result of this is that big, high-quality growth stocks, such as those in the Sivy 70, are undervalued by as much as 15 percent. So there's a good case for bargain hunting in the big-cap growth sector right now. Nonetheless, most conservative long-term portfolios should include a sizable chunk of income investments. And finding suitable picks in that group is actually quite difficult nowadays. Bonds are not terribly appealing, because interest rates are likely to rise. And a percentage point uptick in long-term rates would cause capital losses that would wipe out the next two years' interest on long-term bonds. Moreover, some of the natural alternatives to bonds don't look particularly timely. Energy-related investments have run up along with the price of oil. Real estate investment trusts are vulnerable to any drop in property values caused by rising
mortgage rates. And though some electric utilities offer tempting yields, their earnings growth rates typically aren't high enough to provide double-digit total returns. The best
choice One solution is to look for large seasoned companies, such as those in the S&P 500, that pay high yields and also offer earnings growth greater than inflation. If you're buying a stock for income, you should look for a yield above 3.5 percent. The stock doesn't need to show big earnings gains over the next year or so, but it should offer a long-term compound annual growth rate of at least 7.5 percent. Here are two S&P 500 stocks that meet those hurdles. Neither has near-term momentum, but they both offer long-term earnings growth considerably higher than most utilities. Combined with generous current yields, that gives them total return potential over the next five years or longer that would average 11 percent annually. ConAgra Foods (Research) is one of the country's leading makers of packaged foods. The company's well known brands include Armour, Chef Boyardee and Orville Redenbacher's. In the most recent quarter, sales were up 8 percent, but earnings were down slightly because of discontinued operations and weakness in refrigerated meats. The company has warned that earnings gains could be subpar for the rest of the current fiscal year (ending May 31). Nonetheless analysts give high marks to Conagra's strong cash flow and say there is room for cost cutting. They project compound annual earnings growth at 8.5 percent over the next five years. In addition, the stock yields nearly 4.1 percent. At $27.43 a share, ConAgra trades at less than 18 times earnings for calendar 2005. Newell Rubbermaid (Research) makes a wide range of consumer products. Leading brands include Paper Mate, Rubbermaid, Calphalon and Levolor. Earnings for the fourth quarter from continuing operations, excluding non-recurring factors, rose 21 percent. The company has projected an earnings gain of less than 7 percent for the current year on minimal sales growth. One reason is that Newell is shedding some low-profit product lines, a move that holds back current earnings but will improve the company's long-term prospects. Over the next five years, earnings growth could average as much as 9 percent. In addition, the stock pays a 3.8 percent dividend. At a current $22.16, the shares trade at less than 16 times estimated 2005 earnings. Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.
Source: Cnn.com