Like most stocks, Diageo (DEO 0.30%), Coca-Cola (KO 0.29%), and Molson Coors (TAP -0.02%) had a good year in 2013.
Yet the investment thesis for these stocks is stronger at the beginning of 2014 than it was a year ago. Let me explain why these stocks could win in 2014, and I'll also tell you which of the three should be your "first buy" for the new year.
2014: The Year of the Dividend?
Some investors are wondering if they should sell their stocks now, with the market at record highs. I've come to realize that market-timing strategies are a complete waste of time. Investors who've tried to "book profits" in the market in 2010, and 2012, ultimately lost out on a huge opportunity.
So do not sell, just be a bit more defensive. Your best move to start 2014 is to allocate more money to stocks that offer a margin of safety.
High-yielding stocks are preferred, and these stocks fit that bill. Diageo pays a 2.28% yield, Coors has a 2.28% yield as well, and Coca-Cola checks in at 2.74%.
Dividends are always popular, but here's why they make even more sense in 2014:
- The markets are at all-time highs. If they "sell off," high yields will go higher as the price drops. This may help protect your high-quality dividend stocks from any steep drops.
- The market is less volatile than it was to start 2013. That means that strong corporate earnings may not surprise the market to the upside as much as in 2013. Dividends provide another way to win, beyond capital gains.
- Interest rates are still very low, and may go higher. If they do, the bonds you own may suffer declining values. Dividends offer alternative income.
Why you should buy these dividend stocks, instead of others
The reason to consider these stocks over other high -ielders comes down to two factors:
- The payout ratio. The pay-out ratio, or the percentage of EPS that a company pays out in dividends, should always be under 60%. If it's not, how can we reasonably expect these businesses to reinvest in their companies and grow? Diageo and Coors offer both high yields, and a payout ratio less than 50%. Coca-Cola's annual dividend is a hefty $1.12, but it still keeps its payout ratio less than 60%.
- Growth prospects. After all, if a company pays a high dividend, that's nice, but growing cash flows will send the dividend, and stock price, higher in the future.
Finding growth via "The Illusion of Choice"
With large consumer staples, I look for businesses that have a competitive moat I like to call "the illusion of choice." What this means is that the business owns multiple brands within one space, which protects them against fickle consumer tastes.