eSignal - Smarter Trading Tools

It’s Q2 so what should you do? Look for blue

April 14th, 2016

Despite all the news swirling around about economic turbulence and uncertainty in the near-term, the first quarter of 2016 yielded gains across the broad stock market. While it may be true that there are some headwinds facing the market in the near future, and that news has many investors selling off their equities for safe haven assets, there are clear stock opportunities in Q2.

You may see or read analysts use the phrase "buy on the dips" and not be entirely sure what it means. Buying on the dips means purchasing stocks that have temporarily dropped in value, with the full expectation that they will not only re-gain their previous value, but exceed it. Right now as we head into the second quarter, there are some premier stocks on the markets that have dipped, and the odds of their prices appreciating looks positive.

So what you should do for Q2 is look for blue. Find blue-chip stocks at reduced prices. These dividend stocks are undervalued because of recent events. But they have a proven track record of generating income. And there is good reason to think they will regain part, if not all, of those past yield rates.

Microsoft has paid dividends every year since 2005. Microsoft has paid dividends every year since 2005.

1. Microsoft Corporation
Currently generating a dividend yield of 2.7 percent, this stock admittedly does not make you jump out of your chair to buy it. According to Investor Place, Microsoft certainly falls within the dividend stock category, but Apple's the sexier name among the tech giants these days. So many people may just look at Microsoft as either dying at worst, or stagnant at best.

The reality is that Microsoft has paid dividends every year since 2005. In fact, it has increased its dividend 9.7 percent over the last decade and 16.8 percent since 2012. But you may be thinking: Yeah, that's great. But it trades at 2.7 percent now. Isn't that a sign of its decline?

Short answer: No. To put this into context, Microsoft stock can be bought at a comparable cost to the 10-year Treasury bond – with both generating similar yields by the end of the first year of ownership if you bought them today.

Part of the reason behind this optimism is that Microsoft will be undergoing a seismic shift in a positive direction in the near future. As Satya Nadella enters year two as CEO, he has big plans to transition away from the Windows-based platform into a business cloud and services giant. Currently, Amazon is the pacesetter in the business cloud and services sector, but Microsoft has the resources and the customer base to become a major rival soon enough.

2. Ford Motor Company
Another well-known brand here, Ford Motors is currently generating dividend yields at 4.6 percent, according to Investor Place. This is not only more in line with the type of yields you hoped to see in this article, it may even be a bargain buy.

Even though it has performed well recently, it is still relatively inexpensive when compared to similar blue-chip stocks. For starters, it trades at a 7.1 trailing P/E ratio and a 6.4 forward P/E ratio due to projected earnings this year. If you don't know what those numbers represent, they are strong.

Then consider that 4.6 percent is already a generous yield for a stock that could very well exceed that number by the end of the year. This is entirely feasible because it has pushed its dividend yields up more and more each year recently.

3. Wal-Mart Stores Inc.
Here we go. Wal-Mart again. If you feel a slight breeze right now, that is the powerful gust of wind generated from the force of the collective yawn of the investment community.

Yes, it generates a 3 percent dividend yield, according to a recent Investor Place report. Yes, it has generated less than stellar results in recent months, including a disappointment in Q1. And yes, it may be in the midst of of a market penetration plateau, the Huffington Post noted.

The thing to remember is that Wal-Mart is in the process of an overhaul. While the investment community is divided over its future abilities to penetrate existing markets, the retail mega-giant is looking to become the biggest name in e-commerce. That may sound as plausible as you and I declaring ourselves eligible for the NBA Draft and not only expecting to make a team, but to become LeBron James. But we don't have Wal-Mart's resources.

There is a very real chance that Wal-Mart could rival Amazon soon enough. It is still the world's retail superpower, even with lower results recently. So while a 3 percent yield is underwhelming, this is Wal-Mart we are talking about. The Street recently reported on Wal-Mart's optimistic prospects:

4. AT&T Inc. 
Here's a really divisive blue-chip stock in a different way. AT&T is has been one of the ubiquitous telecommunications giants for over 30 years and remained strong in the space with dividend yields at 5 percent, Investor Place reported.

In fact, it recently hit 16 percent yields at the start of the year, so things in the AT&T world have been good for investors. So why is it here? For one thing, many investors assume it will drop down from that peak.

Another knock on AT&T is competition for the wireless market. Rivals like Verizon, Comcast and Sprint make investors think twice about investing in telecommunications. Four giants competing for a stagnant customer base is not exactly appealing.

These two factors represent market irrationalities because the company's recent yields are the highest over a multi-year period. Not only that, the yield are among the market's best for blue-chip dividend stocks now. Then there is the issue of competition: AT&T is still the biggest of the four. So while prices may continue to get lower for its services due to fierce competition, AT&T is making strides to enhance its offerings to customers with the first 5G network, which could significantly boost its market share.