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Dividend Monsters to Buy After the Pullback

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The Dow (INDEX: ^DJI  ) has declined in 20 of the last 25 trading sessions. That's the longest string of losses in any 25-day period going back to the 1920s. You can almost smell the nervousness building in the market. Yesterday, a headline on Business Insider issued a dire warning: "2008 Was A Practice Run Compared To What Is Coming Next."

What do you do now?

There's something ironic about market pullbacks: People fear them without remembering what a gift they usually end up being. Last summer's dip gave investors a chance to earn a 25% return in a matter of months as stocks surged off the lows. Same thing the year before. Even the crash of 2008 was a blessing if you kept your wits together. Not only were all losses erased in four years, but those who bought low enjoyed one of the best three-year rallies in history. That's what we're scared of?

Blind optimism is dangerous, but let's keep a healthy appreciation for reality, folks: Slowdowns don't always herald a second coming of the Great Depression, and the majority of stock pullbacks leave investors kicking themselves in hindsight, asking why they weren't brave enough to buy.

The S&P 500 now trades at around 12 times earnings, or an earnings yield of 8%. Ten-year Treasuries, meanwhile, yield 1.5%. Ask yourself if these figures seem reasonable, and then think about how you're investing.

Does it make sense? Maybe it does. But if you're light on the stock side, I can think of a few large-cap dividend stocks that deserve your attention after the pullback.

Johnson & Johnson (NYSE: JNJ  ) now trades at 11.4 times forward earnings, and has a dividend yield of 3.9% -- more than 2.5 times the yield on Treasuries. The company has not only paid a continuous dividend, but has increased it every year for half a century. It also maintains a AAA credit rating, something Treasuries have been stripped of. The odds of J&J not markedly outperforming bonds or cash over the next decade are as close to zero as it gets in this business.

Or look at Paychex (Nasdaq: PAYX  ) . After falling more than 10% since January, the payroll processor now churns out a 4.4% dividend yield. One of the more interesting things about Paychex is its potential as an inflation hedge. The company holds billions of dollars for clients before money is issued as paychecks, and earns interest on the stash in the meantime. As interest rates rise, net income may follow.

Pfizer (NYSE: PFE  ) now yields more than 4%, too. Yes, its growth prospects are dismal. That's well known. But the company currently generates enough free cash flow to support its dividend almost three times over. Business could tank, and shareholder returns may hold up nicely. That's the weird stuff you encounter from companies with single-digit P/E ratios.

If you're not into individual stocks, check out a broad-based dividend ETF like Vanguard's Dividend Appreciation (NYSE: VIG  ) ETF, which focuses on high-quality companies with a long track record of paying and raising dividends. It currently yields a third more than 10-year Treasuries. A few years ago, smart people would have told you that would never happen.

Maybe stocks are about to suffer a big letdown. It could happen. There will probably be four or five recessions in the next two decades -- all will send stocks plummeting. That's how it works. That's how it's always worked. But the key to successful investing isn't necessarily predicting what's going to happen next; no one can do that consistently. It's about taking advantage of what's in front of you today, and having the fortitude to endure whatever happens tomorrow. Anyone contemplating cashing out, hiding on the sidelines, or "waiting for things to get better" is doing almost the exact opposite.

"The market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over," wrote Warren Buffett in October 2008. He was right then. Is a similar sentiment right today? No one knows for sure, but it's usually a good bet. Take advantage of it.  

For some more dividend ideas, check out The Motley Fool's special report "Secure Your Future with 9 Rock-Solid Dividend Stocks." It's free. Just click here.

Fool contributor Morgan Housel owns shares of Johnson & Johnson, Paychex, and Vanguard's Dividend Appreciation fund. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Pfizer, Paychex, and Johnson & Johnson. Motley Fool newsletter services have also recommended creating a write covered straddle position in Paychex and a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (21) | Recommend This Article (150)

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 05, 2012, at 3:02 PM, Davedawg wrote:

    Nice article. Surprisingly, or not, it seems most investors do the wrong thing and put all the blame on the market. I ask clients all the time, "do you go grocery shopping hoping to pay full price or do you tend to buy what's on sale?" Kind of a take off of WB.

  • Report this Comment On June 05, 2012, at 4:36 PM, TMFDarwood11 wrote:

    Morgan, I agree with you.

    I am not certain this is the best time to buy, but I realize that puts me in the "market timing" category. However, I have been sitting on some "powder," I already own PAYX and JNJ and I am considering purchasing more.

  • Report this Comment On June 05, 2012, at 5:23 PM, mikecart1 wrote:

    Disagree on JNJ. Great company. Would recommend it for older or those closer to retirement. Way too conservative of a play - even for dividend stocks. With a beta of 0.53 it doesn't go up a whole lot and doesn't go down either. From March 2009 to today it has gone up only 30% not including dividends. You could have done far better with many other stocks on the DOW in that time span.

    Over last 5 years, JNJ has actually declined 1.9% in share price and probably above even when you factor in dividends. Over the last 10 years, JNJ has gone up 86 cents or only 1.4% in share price. Not a fan of JNJ unless your only other alternative is a CD.

  • Report this Comment On June 05, 2012, at 6:58 PM, thenoffya wrote:


    SP500 has declined 15% in the past 5 years. Dow has lost 10% in that time span. These don't count dividends, but JNJ has a dividend double that of the markets, so any gain they make would be outshone by JNJ again.

  • Report this Comment On June 05, 2012, at 8:41 PM, TOM48 wrote:

    Look at ETF SPLV -- all of these are in there, pays a monthly dividend that is higher than any of these individually. And like I said it pays every single month.

  • Report this Comment On June 05, 2012, at 10:59 PM, Nelly08 wrote:

    Always good to know a few good more. I like JNJ as a safe play in this market. I also like Eaton Vances' high yielding dividend fund: EVT. Well managed fund with tons of high yielding companies evenly allocated. Historic dividend payments has been steady with no missed payments for the past 3 years. Currently yielding over 8%.

    Happy investing.

  • Report this Comment On June 05, 2012, at 11:56 PM, xetn wrote:

    Pray tell us, oh great oracle: When will the pullback be over so we can all jump in together and reap a huge return.

  • Report this Comment On June 06, 2012, at 12:37 AM, gcp3rd wrote:

    Just buy your faves on the downward slope - fewer shares with smaller decline, more shares with bigger decline. I like the grocery store analogy above - when stocks go down in price *they are on sale!* If you believed in the company when the share price was going up you darn well better believe in it when the share price is going down. Otherwise you shouldn't own it. So if you believe in it and the price goes down, you know it's time to buy.

  • Report this Comment On June 06, 2012, at 12:43 AM, chris293 wrote:

    it is summer, who hires in summer so even 60000 new jobs is positive from last week's employments' numbers, all the negitive talk is hype for getting people to move their money so some profit while other people lose and even positive hype can cause people to lose big bucks! we need new productd/ideas to move the economy. Dividends are nice but the S&P seems to beat the total returns for these stocks at least to some scoreboard figures i seen.

  • Report this Comment On June 06, 2012, at 1:57 AM, kyleleeh wrote:


    Day traders pay attention to Beta, investors pay attention to cash flow. In my opinion the Goldilocks zone of investing is a company who's dividend is growing faster then their stock price is. I hate seeing my share repurchases get smaller with every dividend check reinvested when the price of a company goes up. Don't forget that the reason Altria was the most profitable S&P stock to own for the last 50 years is because the dividend kept going up while the stock price stayed relatively flat.

  • Report this Comment On June 08, 2012, at 1:03 PM, Threedollarbill wrote:

    I was curious why you might recommend PFE over say, ABT. Does the dividend yield being a bit higher with PFE make it the better company? Does either of these companies have a better growth opportunity in the future?

  • Report this Comment On June 08, 2012, at 1:43 PM, rma1344 wrote:

    Sounds like u recommend buying the dips which smells like market timing ... A practice tmf doesn't support. It's tough to buy dips when you're portfolio has dipped 10% unless u always have a cash reserve for buying dips and not just for emergencies.

    I worry that we're seeing a secular, not cyclical downturn which could wipe out investments. What we're facing is potentially worse than 2008 because it's largely outside our control: namely 17 nations with no central control mechanism. We can't even manage our finances in the US with one culture and one(albeit 635 individuals) legislature!

  • Report this Comment On June 08, 2012, at 1:46 PM, TMFMorgan wrote:

    ^ Thanks for your comments. Buying based on valuations is far different than market timing. One buys at a good price and waits without a thought on when things will turn. The other purports to know when market shifts take place.

  • Report this Comment On June 08, 2012, at 4:22 PM, 46HudsonPU wrote:

    One stock that wasn't mentioned (and usually is) is PG, which has recently been on a 'down-swing' - increased my current holdings in it this week...

  • Report this Comment On June 08, 2012, at 5:48 PM, rma1344 wrote:

    TMF Morgan:

    my point us simpler: where do you get the cash

    to buy when values are high due to price decline?

    This implies that ur never fully invested cus you

    need cash to buy when stocks decline in price. Either that or you sell when the price Is high

    so you have the cash to buy when the stock price

    is low.

    How can u trade if u hold for the long haul: come

    hell or high water?

  • Report this Comment On June 08, 2012, at 6:51 PM, CMFTomBooker wrote:


    "There will probably be four or five recessions in the next two decades -- all will send stocks plummeting. That's how it works. That's how it's always worked."

    Since the actual historic meme for prescience is predicting 7-8 of the last 4 Recessions... Do I have to do the conversion on that?

    Dividend income investing sounds good while the EU rearranges the deck chairs and reserves on the Titanic. There might be a more attractive opportunity though......

    Spain's banks are giving away Spiderman Towels for deposits.

    -Convert some USDs to EURs and make the deposit..

    -Short the EUR/USD

    When the EUR collapses, you net zero, but get a really cool towel.

    Now that's global finance.

  • Report this Comment On June 08, 2012, at 6:52 PM, PoorerThanU wrote:


    The real behind the scenes # was a job loss of 200,000. The government uses a "factor" to capture all of the jobs created by new businesses that they do not census yet. This "factor" for the last jobs report was 269,000 so net gain of 69,000 jobs. What a farce! As with company financials, you have to know the assumptions that went into the numbers before you know what the numbers mean.

    Wake up people! This country is bleeding jobs...not much will improve until the job market improves.

  • Report this Comment On June 09, 2012, at 3:38 PM, fendelfar wrote:

    Reits are looking attractive again. commercial real estate is in demand at todays prices. Plenty of idle cash looking to be invested in new businesses. Mall vacancies are finally starting to fill up.

  • Report this Comment On June 10, 2012, at 11:32 PM, lowmaple wrote:

    Keep some cash handy It may sound as if you are missing out on some investment or interest but if you can buy a divident stock or any for that matter any good stock at 5 or 20 % less,you will reap that profit difference for years to 5%* 20 years is 100% gain.

  • Report this Comment On June 12, 2012, at 2:57 PM, FoolishLonghorn wrote:

    In the last 3 years, JNJ is up 10%, while the S&P 500 is up 40%.

    When it's running well, JNJ is a great company. It has lots of products with strong name recognition and customer loyalty.

    In the past few years, however, JNJ seems to be constantly shooting itself in the foot.

    In the last few years:

    -Children's Tylenol recall

    -Hip Replacement recall

    -Department of Justice kickback investigation

    (To be fair, JNJ was eventually exonerated)

    -Reversal of Abbott patent litigation case

    The recalls are what really bothers me. If you are going to charge a premium for your name brand, you better at least match the quality of your lesser-priced competitors.

    I sold JNJ about 18 months ago. Today it sells for the same price for which I sold it, while the S&P is up another 6%.

  • Report this Comment On June 16, 2012, at 8:13 AM, jap1939 wrote:

    if you want a real return onyour money try gni

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