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(Paul Sakuma)
(Paul Sakuma)

TheStreet.com

Ten top-rated Dow stocks that deliver Add to ...

Before you load up on bonds to prepare your portfolio for a double-dip recession, consider adding some Dow stocks, which are among the cheapest, safest and highest-yielding U.S. equities. Here are the 10 highest-rated Dow stocks, based on analysts' recommendations. They are ordered by percentage of "buy" ratings.

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Merck is paying $5 per share, a 26-per-cent premium.

10. Merck is a global drugmaker. Its second-quarter net income fell 52 per cent to $752 million and earnings per share tumbled 68 per cent to 24 cents, hurt by a larger float. Revenue soared 92 per cent. The operating margin widened from 28 per cent to 31 per cent.

Merck's stock trades at a forward earnings multiple of 9.2 and a book value multiple of 2, 28 per cent and 59 per cent discounts to pharmaceutical industry averages. The shares pay a dividend yield of 4.3 per cent with a safe payout ratio of 35 per cent. Of analysts covering Merck, 18, or 69 per cent, advise purchasing its shares and eight recommend holding them. None advocate selling. A median target of $39.73 suggests the shares could rise 13 per cent.

9. Chevron extracts and sells oil and gas. Its second-quarter profit more than tripled to $5.4 billion, or $2.70 a share, as revenue grew 30 per cent. The operating margin extended from 7.4 per cent to 14 per cent.

Chevron's stock sells for a forward earnings multiple of 7.9, a book value multiple of 1.6 and a cash flow multiple of 5.4, 40 per cent, 53 per cent and 23 per cent discounts to oil and gas peer averages. The shares pay a dividend yield of 3.7 per cent with a safe payout ratio of 34 per cent. Of researchers following Chevron, 18, or 72 per cent, rate its stock "buy" and seven rate it "hold." None rate Chevron's shares "sell." A median target of $92.44 implies that a return of 20 per cent lies ahead.

8. Wal-Mart is the world's largest retailer. Fiscal first-quarter net income increased 10 per cent to $3.3 billion and earnings per share gained 14 per cent to 88 cents, boosted by a smaller float. Revenue increased 5.9 per cent. The operating margin rose from 5.5 per cent to 5.8 per cent.

Wal-Mart's stock trades at a forward earnings multiple of 11 and a cash flow multiple of 8, 15 per cent and 5 per cent discounts to the averages for food and staples retailers. The shares pay a dividend yield of 2.4 per cent with a safe payout ratio of 31 per cent. Of firms that track Wal-Mart, 23, or 74 per cent, recommend buying its shares and eight suggest holding them. A median target of $60.44 suggests a potential return of 18 per cent.

7. Hewlett-Packard makes computer hardware. Its second-quarter profit increased 28 per cent to $2.2 billion, or 91 cents a share, as revenue gained 13 per cent. The operating margin rose from 9 per cent to 10 per cent. HP's stock sells for a forward earnings multiple of 8.1, a book value multiple of 2.2 and a cash flow multiple of 7.4, 45 per cent, 46 per cent and 35 per cent discounts to peer averages. Its PEG ratio, a measure of value relative to predicted long-run growth, of 0.3 signals a 70 per cent discount to fair value.

The shares offer a 0.7 per cent dividend yield with a payout ratio of 90 per cent. Roughly 76 per cent of analysts covering HP rate its stock "buy." A median target of $58.41 implies a potential return of 43 per cent.

Bank of America

6. Bank of America is a financial services company. Second-quarter net income decreased 3 per cent to $3.1 billion and earnings per share fell 18 per cent to 27 cents, hurt by a larger float. Revenue declined 13 per cent. The operating margin rose from 21 per cent to 30 per cent. Bank of America's stock trades at a forward earnings multiple of 8.5, a book value multiple of 0.6 and a cash flow multiple of 1.2, 26 per cent, 30 per cent and 58 per cent discounts to industry averages.

The shares offer a modest 0.3 per cent dividend yield. Of analysts covering Bank of America, 25, or 75 per cent, advocate purchasing its shares and eight recommend holding them. A median target of $20.25 suggests a potential return of 53 per cent.

5. Cisco makes networking equipment. Fiscal fourth-quarter profit surged 79 per cent to $1.9 billion, or 33 cents a share, as revenue grew 27 per cent. The operating margin increased from 18 per cent to 21 per cent.

Cisco's stock sells for a forward earnings multiple of 11, a 31 per cent discount to the communications equipment industry average. Its PEG ratio of 0.6 reflects a 40 per cent discount to estimated fair value. Cisco doesn't pay dividends. Of researchers evaluating Cisco, 38, or 79 per cent, advise purchasing its shares and 10 suggest holding them. None advocate selling Cisco's stock. A median target of $28.16 implies that the shares could gain 28 per cent in the months ahead.

4. United Technologies is an aerospace, defense and technology company. Its second-quarter profit increased 14 per cent to $1.1 billion, or $1.20 a share, as revenue gained 5.6 per cent. The company's operating margin remained steady at 14 per cent.

United Technologies shares trade at a forward earnings multiple of 13 and a book value multiple of 3.3, 6 per cent and 33 per cent discounts to aerospace and defense industry averages. The shares pay a 2.4 per cent dividend yield with a payout ratio of 39 per cent. Of brokerages evaluating United Technologies, 15, or 79 per cent, recommend purchasing its shares and four advise holding them. None rate the stock "sell." A median target of $83.83 implies a potential return of 20 per cent.

Microsoft doesn’t get much love from Wall Street, but it should, according to a couple of John Reese's models.

3. Microsoft designs and sells software. Its fiscal fourth-quarter profit increased 48 per cent to $4.5 billion, or 51 cents a share, as revenue grew 22 per cent. The operating margin extended from 31 per cent to 37 per cent.

Microsoft's stock sells for a forward earnings multiple of 9.3 and a cash flow multiple of 8.8, 57 per cent and 35 per cent discounts to peer averages. Its PEG ratio of 0.9 signals a 10 per cent discount to estimated fair value. The shares offer a 2.1 per cent dividend yield with a conservative payout ratio of 25 per cent. Roughly 80 per cent of analysts covering Microsoft rate its stock "buy." A median target of $33.22 suggests a return of 34 per cent. Credit Suisse expects the stock to rise 61 per cent to $40.

2. JPMorgan is a diversified financial services company. Its second-quarter net income increased 76 per cent to $4.8 billion as earnings per share nearly quadrupled to $1.09. Revenue declined 4.7 per cent. JPMorgan's stock trades at a forward earnings multiple of 7.9 and a cash flow multiple of 2.3, 41 per cent and 17 per cent discounts to industry averages. The shares pay a 0.5 per cent dividend yield with a payout ratio of 6 per cent.

Of researchers following JPMorgan, 28, or 88 per cent, advocate purchasing its shares and four advise holding them. None rate the stock "sell." A median target of $53.11 implies 41 per cent of upside. Barclays(BCS) predicts the stock will gain 59 per cent to $60.

1. Coca-Cola makes syrups and beverages. Its second-quarter profit expanded 16 per cent to $2.4 billion, or $1.02 a share, as revenue grew 4.9 per cent. The operating margin widened from 30 per cent to 33 per cent. Coca-Cola's stock sells for a forward earnings multiple of 15 and a cash flow multiple of 15, on par with beverage peer averages. The shares offer a 3.1 per cent dividend yield with a reasonable payout ratio of 55 per cent.

Roughly 88 per cent of analysts covering Coca-Cola advise purchasing its stock. A median target of $61.44 suggests a 10 per cent return in the months ahead. The equity research group at JPMorgan values Coca-Cola at $66, leaving 17 per cent of potential upside.





Read more about dividend stocks:

  • Dividends rise and shine amid recession
  • How to find funds that deliver steady income
  • Payout ratio: A key tool for dividend sleuthing
  • That sweet spot: Reliable returns, just a little risk
  • Related contentFive fixes for yield-starved investors


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