Building a Barbell for 2014, Part I

 | Dec 17, 2013 | 3:00 PM EST  | Comments
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Stock quotes in this article:

dd

,

jnj

,

pep

,

mcd

Between now and year's end, we will focus on ideas for positioning your portfolio for 2014.

One recommendation is to use a barbell approach, with one bell being opportunistic value-oriented stocks that have strong growth (appreciation) prospects, and the other end being focused on higher dividend-yielding names with lower volatility.

In 2013, the advantage clearly went to the appreciation-oriented group. Looking towards 2014, we believe the returns will be closer between the two groups. We expect these higher-yielding stocks to provide more stability in a year with higher volatility. The right higher-yielding stocks should also hold up well, despite higher bond rates, because of their ability to raise dividends and to grow earnings.

Four stocks fit this profile and should have good prospects in 2014:

DuPont (DD) continues to surprise investors to the upside through corporate restructuring announcements. Management is close to completing a mix of shift to its higher-growing and higher-margin Agricultural, Nutritional, Performance and Safety Materials business. This should allow for more consistent earnings in upcoming years. DD shares are still reasonably priced at 15x 2014's earnings-per-share estimates and have a solid 3.1% dividend yield.

Johnson & Johnson (JNJ) continues to grind out good numbers. Management has done a remarkable job transforming the large Pharmaceutical unit back into a growth entity with several key drug launches. The Consumer Products unit is finally seeing a rebound after years of product recalls, while Medical Devices continues its steady growth profile. Management has also enhanced the performance through aggressive restructuring programs. JNJ shares are reasonable priced at 15.6x 2014's EPS estimates, and carry a solid 2.8% dividend yield.

PepsiCo (PEP) should also report steady and consistent numbers for 2014. Management continues to execute on its broad global restructuring initiative to reduce costs and it is reinvesting the proceeds into new product development, advertising and marketing campaigns, and global expansion. We expect PEP to report 4% to 5% revenue growth and 8% to 9% earnings growth. The company is looking to enhance the returns with steady share repurchase programs. PEP shares are reasonably priced at 17.5x 2014's EPS estimates, considering its outstanding long-term track record. The shares have a solid 2.8% dividend yield.

McDonald's (MCD) has stumbled in recent years due to a weak global macro economy. However, we believe that management's initiatives to reaccelerate the top and bottom lines will be successful in the upcoming year. One should expect new products, better service and more advertising campaigns. To offset the disappointing numbers, the board has favorably boosted the dividend to 3.4% in the past year. MCD's shares are well priced at 15.7x 2014's EPS estimates. Better performance combined with the reasonable valuation level and high dividend yield should provide MCD's investors with stability and upside in the coming year.

These lower-risk, higher-yielding stocks should provide balance and stability in the upcoming year. On Friday, we will discuss value picks with higher appreciation potential to build the other end of the barbell.

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