Dividends and Earnings Make Stocks Very Fairly Priced

dividend paying stocksThere may not be a lot of top-line growth out there. If gross domestic product (GDP) isn’t growing, then how can corporate earnings? But there is decent value in the stock market and a lot of the value is available from solid, dividend paying companies.

Consider, for example, Intel Corporation (NASDAQ/INTC, $26.00), which is trading about three points below an eight-year high. The stock has a trailing price-to-earnings ratio of 11, and a forward price-to-earnings ratio of 10. The company has almost $14.0 billion in cash, or $2.75 per share, and about $7.5 billion in debt. The stock’s current dividend yield is 3.3% and this, combined with earnings, should produce growth of low double digits going into 2013. I therefore view this company as being fairly valued.

Another blue chip, dividend paying company that looks very fairly priced on the stock market is Deere & Company (NYSE/DE, $73.00). The venerable maker of agricultural and lawn equipment has a trailing price-to-earnings ratio of about 10, but in the last month or so, no less than 21 Wall Street analysts increased their earnings outlook on Deere for this year and for 2013. The stock boasts a current dividend yield of 2.6% and company management is currently saying that agriculture fundamentals are very strong right now, which I believe.

Even McDonald’s Corporation (NYSE/MCD, $88.00) is not looking expensive in this market. This company was, and continues to be, a stock market darling, hitting an all-time record high of $102.00 a share at the beginning of the year. The stock’s forward price-to-earnings ratio is approximately 14, and corporate earnings are expected to grow about seven percent this year and 10% in 2013. Add in a current dividend yield of 3.2% and this market leading stock seems fairly priced to me.

There are a lot of examples in today’s stock market of attractive, growing companies with good dividend yields and fair valuations. What there is not is a tailwind for investors in a stock market that is fraught with investment risk.

The most important thing in the stock market is getting the timing right. It’s the most difficult thing to accomplish; but, at the same time, it’s the biggest determinant of investment returns. There are plenty of arguments that many dividend paying stocks are worthy buys at this time due to their attractive valuations. Yet, if there’s no progress in the eurozone’s sovereign debt crisis, the stock market could come apart.

The next U.S. recession would be the most attractive time for new positions in the stock market. (See Stock Market Breakdown: How a Correction Would Be a Buying Opportunity.) This could happen next year and the kind of stocks I would say are the best bets for the rest of this decade are conservative, higher dividend paying stocks, which can benefit from price inflation. Right now, stock market investors are trading off their emotions, buying and selling on hope and fear. But the saving grace for the current environment consists of equity valuations that are, for the most part, appropriate. Expectations for corporate earnings may have come down, but I think companies will once again surprise to the upside, as they’ve mostly done over the last 18 months.