Daily Gains Letter

Dividend Paying Stocks with Big Capital Gains

By for Daily Gains Letter | Feb 22, 2013

220213_DL_clarkThe strength we’ve seen in the stock market over the last several years has been a boon to large-cap dividend paying stocks. An investor no longer needs to take the high investment risk of speculating on micro-cap companies; big-cap companies are moving just as fast and furious on good news.

Most investors with a stock market portfolio typically have a mix of holdings that would include individual stocks, mutual funds, and perhaps some exchange-traded funds (ETFs). For individual stocks, it definitely pays to be diversified, not only among industry groups but among the market capitalization of companies as well. A handful of large-cap dividend paying stocks can go a long way toward normalizing your investment returns over time.

Among the dividend paying stocks that I like, Johnson & Johnson (NYSE/JNJ) takes the cake in terms of stability, consistency, and earnings growth. I think a well-balanced stock market portfolio should have a pharmaceutical company as a component. Pharmaceuticals are such a large part of the economy now, and pharmaceutical companies are very good at making money for shareholders. Johnson & Johnson’s long-term stock chart is below:


dg_02222013image001Chart courtesy of www.StockCharts.com

This company has been very consistent in terms of its earnings growth over the years, and among dividend paying stocks, it’s been one of the best. It is true that large-cap companies can experience long periods of no capital gains; but then again, that’s what the quarterly dividends are for.

And what a company like Johnson & Johnson represents in a portfolio isn’t just about capital gains. It’s a benchmark holding that grows its earnings and dividends over time, providing stability to a diversified stock market portfolio. I would add, however, that even the most conservative, dividend paying stocks can move considerably when stock market conditions are favorable. Johnson & Johnson’s share price is up a full 10% since the beginning of this year; and it’s up 24% since last June. For any dividend paying stocks, that’s a great capital gain.

Johnson & Johnson is one of those long-term stock market holdings that are worth building a position in. The stock often experiences periods when it isn’t performing, but according to its track record, it’s never down on the stock market for long.

The great thing about this large-cap pharmaceutical company is its complementary business lines that keep earnings strong when the economy is flat. I firmly believe that dividend paying stocks like this one are the way to go in a slow growth environment. A company like Johnson & Johnson can keep its earnings and dividends rising through international cost control during recessions. And any uptick in business conditions goes right to the bottom line when economic growth improves.

The stock market is currently trading around its five-year highs, making it difficult to be a buyer. I wouldn’t be buying in this market, but I would be watching any dividend paying stocks similar to Johnson & Johnson for any price corrections.

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