5 Stocks You Need for a Balanced-Budget World

Before you go, we thought you'd like these...
Before you go close icon

You might get scared at what I'm about to tell you, but you shouldn't. Instead, get inspired. Right now looks like a great opportunity to lock in low prices on high-quality companies, and ride them to wealth in the years to come.

If you've had occasion to flip on a TV recently, you've been bombarded with news about spending cuts that may or may not balance the budget. There's really only one possible outcome to these debates, and it's not positive. Congress can decide to cut money from the budget, or cut more money from the budget. Either way, the government's bread is getting sliced, and that means slower economic growth, since we're in the midst of a liquidity trap.

Whereas the Federal Reserve has tried to stimulate economic activity through lower interest rates and quantitative easing, Congress is moving in the diametrically opposite direction. So should you stay out of stocks? Heck no!

Value wins yet again
But just because you should own stocks, it doesn't mean you should own any old stock. If the investing legends have taught us Fools anything, it's that value stocks win in the end. You buy companies when they're cheap, hold them, and sell when they get pricey. If you can snag a dividend in the process, all the better.

But why buy now, and which stocks look attractive? Let's take a look at four bits of Foolish wisdom.

Waiting won't help
As superinvestor Warren Buffett argued:

Wouldn't it be better to wait until things clear up a bit? ... Before reaching for that crutch, face up to two unpleasant facts: The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.

In other words, to get good long-term values you, have to buy when there's uncertainty. And we have plenty of that now with the budget morass.

Cash is not the answer
While some pundits would have you convert your entire holdings to cash, selling every last stock you own "is one of the biggest wealth-destroying traps you can fall victim to," explains Morgan Housel, one of my favorite Foolish analysts:

There have been 20,798 trading sessions between 1928 and today. During that time, the Dow went from 240 to 12,500, or an average annual growth rate of 5%.... If you missed just 20 of the best days during that period, annual returns fall to 2.6%. In other words, half of the compounded gains took place during 0.09% of days.

You can't time the market, so you just have to buy when stocks look cheap.

Stocks still look like bargains
At the start of the year, large caps traded at a P/E of 14.8, the lowest they've been since the 2008-2009 crisis and 1990 before that. The S&P 500 is up a modest 3.4% so far this year, meaning large caps still look cheap historically. And wouldn't you have loved to own stocks at 1990 valuations before they went on a massive tear?

Get paid for your trouble
As I've shown elsewhere, dividends help stabilize your portfolio, leading to lower downside risk. Numerous studies have shown that a dividend-focused portfolio outperforms, and many large caps pay out nice yields.

Let's put that all into practice
I entered all the qualities above into my trusty screener, seeking companies with a market cap of at least $10 billion and a P/E below 10. Below, I highlight five cheap large caps paying monster dividends, then explain why you should consider owning them.

Company

Market cap

P/E

Yield

National Grid (NYS: NGG) $33.8 billion9.46%
AT&T (NYS: T) $174.9 billion8.95.9%
Telefonica (NYS: TEF) $98.0 billion7.410.6%
BP (NYS: BP) $141.3 billion7.13.9%
Annaly Capital (NYS: NLY) $16.6 billion6.715.5%

Source: Capital IQ, a division of Standard & Poor's.

I recommended National Grid back in January, and the stock has risen 15% (dividend-adjusted) since then. I've also added it as part of what I call the world's best dividend portfolio. This regulated utility operates power and gas transmission systems in the U.S. and U.K. It operates like a toll road, earning money whenever gas or electricity move across its transmission network. Its hard assets are absolutely vital, and they help backstop the stock's valuation. The yield is tasty, too.

AT&T is cheaper still, and it provides a dividend similar to National Grid's. The telecom is the largest in the U.S. by market cap, and it aims to gobble up smaller rival T-Mobile USA, much to the chagrin of Verizon. Analysts project nearly 6% earnings growth at Ma Bell over the next half-decade, which should give the company room to boost its dividend.

If you'd like more diversification in your telecom investment, you might also consider Vodafone (NAS: VOD) , another holding of the world's best dividend portfolio. The company just missed the screen, at a P/E of 11.2, but it, too, offers a sizeable dividend at 5.2%. Plus, the company will pay out a special dividend early next year, as it begins to receive dividends from its joint venture with Verizon.

Telefonica is another telecom paying a heavyweight dividend. Concerns about Spain and the E.U. generally have weighed shares down. But the company generates 45% of its revenue and 59% of its operating profit from the fast-growing economies of Latin America. So it looks like Madrid-based Telefonica is being unfairly tossed out on its ear.

BP stock still looks cheap in the wake of last year's Gulf of Mexico disaster. The company has promised a progressive dividend policy, meaning that its payout should quickly return to pre-crisis levels as earnings ramp up again. Some analysts have speculated that its stagnant share price could lead to a spinoff of its refinery operation, so the company still has a means to unlock perhaps as much as $100 billion in shareholder value. Rival ConocoPhillips (NYS: COP) has just opted to spin its downstream assets, following a similar move by Marathon Oil earlier this year.

Lastly, I still like Annaly Capital -- even more so, now that Congress is doing little to help the broader economy. As long as interest rates remain low, unemployment stays up, and economic growth totters, Annaly looks like a solid dividend play. I own shares of it myself, and I've purchased it for my public-facing Rising Star portfolio.

Foolish bottom line
I know it's tough to invest when every talking head from here to Peoria scares the pants off of you with tales of the government not paying its bills. But fortunes are made during times of uncertainty. With that in mind, we've created a special free report called "5 Stocks the Motley Fool Owns and You Should Too" that you can download today at no cost. Tens of thousands have requested access to this report, and today you can download it for free by clicking here.

At the time this article was published Jim Royal, Ph.D., owns shares of Annaly, National Grid, and Vodafone. The Motley Fool owns shares of Telefonica and Annaly.Motley Fool newsletter serviceshave recommended buying shares of National Grid, AT&T, and Vodafone. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners