Dividend Monsters to Buy After the Pullback

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 (NYS: 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 (NAS: 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 (NYS: 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 (NYS: 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.

At the time this article was published 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.
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