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Contrarian Stock Picks With Dividend Income

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The news cycle is weighing down certain sectors like health care and utilities, but it may pay off to add them to your portfolio now.

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Dark clouds in financial news often have silver linings for stocks that you would least suspect.

It also helps if the companies in the shadows pay dividends. And if you're a contrarian, you get some decent payments even if the stock price doesn't rise.

Health care is a case in point. The conventional wisdom has been that the new health-reform law will deliver a roundhouse punch to this industry. Drugmakers will have to discount their products. Insurers won't be able to gouge individual policyholders.

The truth is a bit nuanced. The reality is that 32 million new customers will be required to buy health insurance and will need life-saving drugs. None of this will happen quickly, though.

Far too many quality companies have been discounted by the market in the short term because investors haven't quite digested the big picture.

A company like Johnson & Johnson (JNJ), for example, makes everything from Band-Aids to biotech drugs. It's consistently profitable and fairly well diversified. Even if the market is sour on J&J's short-term prospects, you can't ignore its 3% dividend yield. The company raised its dividend by 10% in the most recent quarter, something it's been doing for 48 straight years.

Will health-care reform prompt J&J to discount its products? Probably. Buried in the law is a basic benefits provision that, in future years, will require insurers to offer drug coverage. That means more customers for J&J, not less.

In the interim, the "health-care haircut" has taken down J&J's price a bit. It's traded as low as $50 a share, but is targeted to reach an average target price of $72, according to Zacks.

You need look no further than the utilities industry to get a glimpse of another sector that's been sitting under rain clouds.

Climate change legislation, which has moved at a snail's pace through the US Senate, will likely eventually pass. With a wind at the administration's back from the health-care victory, expect a compromise to be reached this year.

As with health companies, it's far too easy to bad mouth old-style utilities. They do tend to belch a lot of carbon dioxide if they generate most of their power from burning coal. They are certain to face more regulation, carbon taxes, or a system of "cap and trade."

Yet there are some companies that will come out of climate change legislation just fine. Exelon (EXC), one of the nation's largest nuclear power producers, seems to be well positioned.

I know. No nukes. Three Mile Island. Chernobyl. Where can the radioactive waste the industry generates be stored safely for a few thousand years?

Well, I certainly can't solve the waste disposal issue and few in government or industry have nailed down a solid plan of action. It's one of the thorniest political and environmental problems ever.

When I put this question to John Rowe, Exelon's savvy chairman, a few years ago, though, he insisted he would build no more new nuclear plants until we had a safe and long-term solution to the waste storage issue.

The indisputable bottom line is that nuclear power produces little to no carbon dioxide.

While it's certainly not the cleanest way to produce power (solar, wind, and hydro are better), it can generate lots of kilowatts with relatively little fuel. And even some environmentalists such as Stewart Brand are seeing that as an alternative to fossil fuel burning. The Obama Administration has also stated that it will provide subsidies to the nuclear industry.

Like most of the utilities, Exelon offers a healthy dividend yield -- almost 5%.

Long-term dividend payers are generally established companies that may not be in the sexiest fields. Don't expect to find many high-flying tech stocks in this bunch.

A good place to hunt for dividend stalwarts is the Standard & Poor's Dividend Aristocrats Index, which is comprised of companies that have had steady payouts for the past 25 years.

While you're always exposed to market risk with a dividend payer, there's much less volatility -- and potentially more return -- in the S&P high-dividend group. The index was up 3.32% over the past half decade through last year. That compares to 0.42% for the larger S&P 500 Index.

I'm not advocating that you go out and buy one or two high-dividend stocks. You'll introduce too much market risk into your portfolio. A better way of reaping yield is through an exchange-traded fund such as Vanguard's High Dividend Yield ATF (VYM), with top holdings in ExxonMobil (XOM), Microsoft (MSFT), and J&J, or the Alpine Dynamic Dividend Fund (ADVDX), which counts ITC Holdings (ITC) and Schlumberger (SLB) in its top five.

With dividend-focused ETFs, you can be a contrarian and build your nest egg -- while reaping income.


Got a personal finance question or subject you'd like me to explore? Let me know by leaving a comment.

John F. Wasik is author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.
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No positions in stocks mentioned.

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