The Deals Are Getting Good Again

Is anyone else a little relieved by this market sell-off?

Don't get me wrong. The 13-month rally that ended a few weeks back was a welcome respite after the six panic-filled months that began with the Lehman Brothers collapse.

Still, back in April the market appeared to be pricing in a full-on economic recovery that simply wasn't being felt on Main Street, and there weren't many values left to buy. The extended rally felt too good to be true, and it probably was.

And that's ... OK
In an era when instant gratification is the rule, not the exception, it's easy to be surprised when things don't immediately work out the way we'd hoped. The fact that the market has fallen in the past weeks, however, does not imply the American recovery is lost. What, did we really think getting out of our economic problems was going to be that easy?

No, it's still going to be a long and slow recovery. There's much left to be sorted out and repaired before the good times can roll again.

It's all a natural part of the business cycle; during a recession, the deck gets reshuffled and inefficiencies spawned during the boom are corrected. This is already beginning to happen to some degree -- a recent survey done by The Kauffman Group showed that entrepreneurism was at a 14-year high in 2009, higher even than during the dot-com boom. Americans truly are capable of incredible things when times are tough.

It's just going to take some time.

Patience, grasshopper
Meanwhile, we shouldn't be afraid to put money to work when great values present themselves, and today the deals are popping up again.

Dividend-paying stocks are particularly appealing in an anemic market because they provide a real return while you wait for share prices to recover. With that cash in hand, you can buy more shares, put it in the bank, or buy groceries. The choice is yours.

In fact, the recent downturn has provided a number of strong blue chip stocks with well-covered dividend yields over 3%. These opportunities don't come around very often, either -- from 1997 to 2007, for instance, the S&P 500 posted an average yield below 2% -- so when you can snag some higher-yielding bargains in a temporary market downturn, you can set yourself up well for when the market recovers again.

Here are seven dividend-paying blue chips that look particularly attractive right now:

Company

Dividend Yield

Free Cash Flow Payout Ratio
(Dividends Paid / Free Cash Flow)

Interest Coverage
(EBIT / Interest Expense)

Intel (Nasdaq: INTC  )

3.1%

29%

NM

McDonald's (NYSE: MCD  )

3.3%

55%

14.7

ConocoPhillips (NYSE: COP  )

4.4%

80%

8.1

Bristol-Myers Squibb (NYSE: BMY  )

5.4%

71%

33.6

AT&T (NYSE: T  )

6.9%

59%

6.6

Procter & Gamble (NYSE: PG  )

3.2%

36%

16.2

Coca-Cola (NYSE: KO  )

3.5%

58%

20.0

*Data provided by Capital IQ as of June 6. EBIT = Earnings before interest and taxes. NM = Not meaningful.

Each of these companies generates more than enough free cash to cover its dividend payouts and has manageable debt expenses. In short, they're good places to start your research.

Foolish bottom line
Despite some encouraging progress relative to where we were two winters ago, the market will remain difficult to navigate as the economy finds its footing and starts gaining real traction. In the meantime, keep a bit of cash ready to pounce on values and focus on generating additional income for your portfolio.

At Motley Fool Pro, we've fortified our $1 million real money portfolio with a number of solid dividend payers like the aforementioned Intel and have been using options strategies like covered calls to produce even more income. If you'd like to learn more about Pro, simply drop your email address into the box below.

Motley Fool Pro analyst Todd Wenning was a Stephen Strasburg cynic, but is now a believer. He owns shares of Procter & Gamble. Intel and Coca-Cola are Motley Fool Inside Value recommendations. Coca-Cola and Procter & Gamble are Income Investor choices. Motley Fool Options has recommended buying calls on Intel. The Fool has created a covered strangle position on Intel, owns shares of Coca-Cola and Procter & Gamble, and has a seriously good disclosure policy.


Read/Post Comments (14) | Recommend This Article (53)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 09, 2010, at 6:08 PM, jvgfool wrote:

    This is off this subject, but what's up with Dick Morris and "Aftershock" in the FoolWatch Daily. It's Dick Morris and this Republican cronies that cause the big spending that we are suffering from today. Obama's healthcare reform is to bring spending down in time. When do we get real about our spending discussions?

  • Report this Comment On June 09, 2010, at 6:11 PM, SCWinehound wrote:

    I could use some advice from some of the more seasoned Fools out there. I have heard that a good rule of thumb is to sell a stock if it drops 10%. With the volatility in this market, I have adapted that to sell if a stock loses 20% of its value after I purchase it. Does this make sense, or should I buy and hold and have faith? BTW, as a general rule, I Ibuy stocks that are highly rated (4-5 stars) by the MF community and that have PE ratios below 20.

  • Report this Comment On June 09, 2010, at 6:23 PM, dyadco wrote:

    I would be inclined to sell after a drop of 8%, 20% loss is too much to recover and in this market recovering may take much longer than you anticipate.

    I'm cashed up now....having sold ALL my equities.

    Why?

    Because I think better buying days are ahead.

  • Report this Comment On June 09, 2010, at 6:48 PM, PALH wrote:

    Dick Morris is a joke.

  • Report this Comment On June 09, 2010, at 7:30 PM, damdam1 wrote:

    TO ALL YOU WONDERFUL PEOPLE:

    I HAVE MANY STOCKS IN MY PORTFOLIO AND I BOUGHT THEM BECAUSE I LIKED THEIR RESULTS IN THE PAST YEARS AND IT LOOKED AS THOUGH THEY WOULD CONTINUE TO BE WELL RUN COMPANIES. AS TO SELLING I NEVER THING OF IT UNTIL THEY NO LONGER CAN SUSTAIN THE PROFITS THEY WERE PURCHASED FOR. THEN I SELL THEM AND TAKE MY LOSS AND THUS SAVE3 ON TAX. RIGHT NOW I AM FULLY INVESTED AND SLEEP WELL EVERY NIGHT EVEN THOUGH I HAVE A LOT OF BP AND IT IS A LOOSER RIGHT NOW. I SOME TIMES GO OFF THE DEEP END AND BUY A COMPANY THAT IS NOT DOING WELL BUT I THINK IT WILL RECOVER AND GO ON TO MAKE ME A FEW DOLLARS MOST RECENT IS "ROYAL BANK OF SCOTLAND" WHO EVER HEARD OF A SCOT LOOSING MONEY. DAMDAM1@SBCGLOBAL.NET.

    \

  • Report this Comment On June 09, 2010, at 7:36 PM, OPTIONNUT wrote:

    Now you tell me when I am pretty much fully invested and hate to sell at a lose....where were you 6 weeks ago?

    Ok...How about MO or PM, why are these higher paying with a longer history not on your list...especially in a frustrating market that causes people to Smoke more often and maybe even start Smoking?

    Hell, Give me a cigar!

  • Report this Comment On June 09, 2010, at 9:39 PM, ChrisBern wrote:

    jvgfool - The healthcare reform will unfortunately not bring down spending: http://www.cbsnews.com/stories/2010/04/23/politics/main64237...

  • Report this Comment On June 10, 2010, at 10:27 AM, wbjunk wrote:

    err.. jvgfool... you've got to be kiddin'!!

  • Report this Comment On June 10, 2010, at 4:16 PM, thidmark wrote:

    "Obama's healthcare reform is to bring spending down in time."

    Somewhere, P.T. Barnum is chuckling.

  • Report this Comment On June 11, 2010, at 12:52 AM, mikecart1 wrote:

    BP has an awesome dividend right now. I say BUY BUY BUY!!

  • Report this Comment On June 11, 2010, at 4:11 PM, nojack wrote:

    BP has only 8 Billion in cash on hand. I don't believe that will cover the lost wages, damage claims, clean up bills, etc., etc. Not good.

  • Report this Comment On June 15, 2010, at 10:30 PM, philkek wrote:

    MF Star ratings of 4 & 5 on a stock give me a starting position. MF then suggests doing your own homework before investing real money. I have lost big money at 25 % down. I once left town and came back to a 35 % loss. That really hurt ! 8 % down stop loss sounds like good advice. Can any fool out there suggest what % YOU start raking in SOME of your gains ? I was told 150 % up is best, then sell. Thanks to all smart fools with good, better, best advice. Fool on for BIG honest money.

  • Report this Comment On June 16, 2010, at 1:15 PM, xjp83x wrote:

    @SCWinehound

    I can see that you are pretty new to investing. I think selling when it's going down on a volatile market is stupid. You cannot predict the market. Don't try to. Also, if you picked the company because they are good, and they have a P/E of below 20, that means that they are good companies with a fair value. You should buy more when it's cheap, but never sell any just because of short term volatility. See what the market does. After you sell, the market could shoot right back up. Be careful in your decisions. Why don't you just hold on to it for long term? I only sell my stocks when I see the company as being unprofitable. I only fool with volatility in options trading.

  • Report this Comment On June 17, 2010, at 5:46 AM, OklaBoston wrote:

    Does this Capital IQ outfit have a website where I could check the Free Cash Flow/Payout Ratio for stocks other than the ones listed above?

    For SC Winehound, I don't have much experience with actual trading but have been making a hobby of studying the stock market via this and other websites for several years. Based on that study I'd say that buying almost any stock that's been public less than 6 months is a bad strategy.

    Wait until the stock has dropped well below it's IPO price and started moving back up, which it probably will do if it's a fiscally sound outfit. That's what I plan to do when I feel ready to risk real money on my beliefs.

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