5 Great Dividend-Paying Stocks to Buy -- Even Now

These bulletproof blue chips are selling at dirt-cheap prices. Buy them, or buy the Vanguard fund that owns them.

Europe is teetering on the brink of a financial meltdown, and many fear that U.S. banks could be ensnarled in a European "Lehman event" should one of the continent's major banking institutions collapse. That, in turn, could jeopardize America's economic recovery.

Why would anyone want to buy stocks against that kind of backdrop? Because the market has been marking down stocks to fire-sale prices. You can now buy many of America’s most durable companies at price-earnings ratios in the high single digits and low double digits, their lowest multiples in at least a decade. Plus, many of these stocks yield as much, if not more, than Treasury bonds.

Below are five excellent companies that have raised their dividends at least ten years in a row and are likely to keep raising them. If you prefer to buy a fund, consider Vanguard Dividend Growth (symbol VDIGX), which owns all of these stocks and about which I’ll say more later.

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Abbott Laboratories (ABT) is splitting in two -- one piece will contain Abbott’s drug-making business, the other will be made up of its diagnostics, nutritionals, medical-device and generic-drug units. Abbott’s blockbuster drugs include Humira, for Crohn’s disease and psoriasis; HIV drug Kaletra; and cardiovascular medications. And the firm has many potential winners in its pipeline.

Yet at a share price of $53.05, Abbott yields 3.6% and trades at just 11 times analysts’ estimated earnings for the coming 12 months (all prices and related data are as of November 29). That’s Abbott’s lowest P/E in at least a decade. When pharmaceuticals were still glamour stocks in 2001, Abbott sold for 57 times earnings.

Automatic Data Processing (ADP) is the largest provider of payroll and related services in the U.S. and has 550,000 clients worldwide. Its immensity gives it a competitive advantage, as does the high cost of switching payroll-service providers.

At $48.76, ADP stock yields 3.2% and trades at P/E of 16. The only time in the past decade that its P/E was that low was in 2009, during the bear market that coincided with the financial meltdown and the recession.

Johnson & Johnson (JNJ) is the world’s leading health care company, with a diverse portfolio of businesses in over-the-counter medicines, medical devices and pharmaceuticals. The company has suffered from a string of recalls. But it has several blockbusters on the market, and a number of potential winners in trials.

At $62.78, Johnson & Johnson trades at 12 times earnings, a lower P/E than at any time in the past decade. It yields 3.6%.

PepsiCo (PEP) grew based on Pepsi-Cola, the long-time number-two soft drink behind Coca-Cola. But the company today has a broad product line, with brands such as Dorito’s, Quaker, Lay’s, Gatorade and Tropicana.

Pepsi, which trades at $63.66, yields 3.2% and sells at a P/E of 14. Like J&J, Pepsi’s P/E is the lowest it’s been in at least a decade.

ExxonMobil Corp. (XOM) is the world’s largest publicly traded company by market capitalization (a designation it seems to share alternately with Apple, depending on each stock’s daily price moves). What sets the energy giant apart from its competitors is its relentless pursuit of efficiency. Consequently, it boasts its industry’s highest return on capital, a measure of profitability.

At $76.93, ExxonMobil yields 2.4% and trades at 9 times earnings. Again, that’s its lowest P/E in at least a decade.

Vanguard Dividend Growth provides a sensible way to buy these stocks -- and about 43 more blue chips -- at an annual expense ratio of just 0.34%. Manager Don Kilbride doesn’t make big bets -- most of his individual holdings account for just 2% or so of the fund’s assets. Turnover is just 17% annually, suggesting that the fund holds a stock for an average of six years.

Kilbride, 47, is with Wellington Management and has run the fund since 2006; Wellington has managed the fund since its inception, in 1992. Kilbride’s goal is to beat Mergent’s Dividend Achievers Select index, which tracks blue chips with a strong record of hiking dividends (so far he has been successful).

Over the past five years, the fund returned an annualized 2.9%, putting it in the top 3% of funds that focus on large-company stocks with both growth and value attributes. During that period, the fund beat Standard & Poor’s 500-stock index by an average of 3.8 percentage points per year.

Dividend Growth, which is about 21% less volatile than the S&P 500, really shows its strengths in weak markets. In the 2007-09 bear market, when the S&P plunged 55.3%, the Vanguard fund lost 42.3%.

Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area. He and several of his clients own shares in Abbott Laboratories, Johnson & Johnson and ExxonMobil.

Steven Goldberg
Contributing Columnist, Kiplinger.com
Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.