The 3 Best Buys on the Dow Right Now


Days like today give investors very little to worry about. The market started decidedly down but ended the day slightly up -- but flat for all intents and purposes. It's days like this when, rather than surveying the damage or rejoicing, investors should scour the markets for their next big opportunity.

By all accounts, today was a boring day across the broad markets. The Dow Jones Industrial Average (INDEX: ^DJI) gained 0.1% today. Not exactly newsworthy. But I do think some of the specific components might just hold exactly what investors have been seeking in today's surging but still-risky environment.

Where opportunity lies
As a generalization, the stocks in the Dow are established, well-run, dividend-paying large caps that certainly hold promise but not the upside of a Rule Breaker kind of stock. That's all right, since not losing is in many ways just as important as winning in the game of investing. So looking across this stable but still-vibrant set of stocks, I certainly see some promise, and looking across the Dow, I think these three stocks have bright futures ahead:

  • The industrialization of emerging markets certainly isn't a revelation at this point, but it's also not a finished story, either. Fortunately, industrial-machinery titan Caterpillar (NYS: CAT) remains more than ready to seize this sweeping trend. Better yet, the company has a strong track record of returning capital to its shareholders. Over the past five years, Cat's grown its payouts at an average rate of 10% annually. Trading at 14 times earnings, the company looks both cheap and positioned to capitalize on a long-term driver of growth.

  • Market-leading companies with strong fundamentals are great places to look for potential buys, and this idea is no different. Semiconductor industry powerhouse Intel (NAS: INTC) owns the semi space like no one else. According to the latest figures out of IHS iSuppli, Intel widened its lead in the semiconductor market to a 10-year high in 2011, owning 15.6% of the overall marketplace. Beyond that, and given its 3% yield and 11.8 earnings multiple, I still think Intel looks attractive.

  • If you're looking for another attractive dividend play, General Electric (NYS: GE) gives income investors a lot to like. The company has largely righted the ship with its GE Capital unit that generated the lion's share of its problems during the financial crisis. In fact, GE Capital should begin paying a dividend to the parent company as soon as this year. The company has also done a great job shifting its strategy to more forward-looking growth markets -- namely, energy and infrastructure. With its 3.4% dividend that has grown by more than 32.6% over the past year, the company blows the market's 1.8% dividend out of the water.

What it all means
Each of these companies offers investors attractive valuations, solid payouts, and limited downside. For investors with an eye to the long term, stocks that fit this bill make a lot of sense. Contrast these with risky but tantalizing dividend stocks such as Annaly Capital Management (NYS: NLY) , whose 13.5% dividend knocks the others we've looked at out of the water, and you see a stark difference. In fact, Annaly's amazing dividend looks to be at risk: The increased likelihood of higher interest rates has driven the stock down 1.4% since the beginning of 2012.

The safety of a company's dividend is paramount for all income investors. In that spirit, the Fool recently compiled a report detailing nine outstanding dividend stocks we think investors need to know about. Better yet, we made the report completely free for our readers, so access your free copy today.

At the time thisarticle was published Andrew Tonner holds no financial position in any of the companies mentioned in this article. The Motley Fool owns shares of Annaly Capital Management and Intel.Motley Fool newsletter serviceshave recommended buying shares of Annaly Capital Management and Intel. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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