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3 long-term picks yielding 3%

Good holdings for an up or down market.

  • By Jeff Reeves,
  • MarketWatch
  • – 06/06/2013
  • Investing in Stocks
  • Dividend-Paying Stocks
  • Stocks
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The jury is still out on whether we are in the early stages of a once-in-a-generation bull market or on the edge of a precipice where the gains of the past few years are about to take a serious hit.

For what it's worth, I am cautiously optimistic about the rally.

While some summer consolidation is probably in order after the great start to 2013, the American economy is slowly stabilizing and both stocks and real estate are on the way up; things will continue to improve globally in the long term.

That means on a pullback, I'll be buying.

But whatever your opinion is on the current environment, you don't have to be "right" about the near-term direction of the market in order to invest profitably. Plenty of data show long-term investing in stable dividend payers is a great way to grow your nest egg -- and after the dot-com crash and financial crisis, many investors are coming around to the idea of modest but consistent returns in a buy-and-hold portfolio of dividend payers.

If you're unconcerned with timing the market and prefer long-term capital gains to short-term churn, here are three picks you may want to consider buying and holding:

AT&T

As a $190 billion megacap, AT&T Inc. (T) isn't going anywhere. It shares a near duopoly on the wireless market with Verizon (VZ). Recently, AT&T announced plans to expand its 4G LTE service to cover nearly 200 million customers. Beyond that, AT&T is one of just a handful of American companies including Verizon, Comcast (CMCSA) and Time Warner (TWX) providing high-speed Internet access at scale to both homes and businesses -- a great business to be in during this data hungry age.

The big risk lately, of course, is that Highfields Capital Management's founder and CEO Jonathon Jacobson publicly came out as being short AT&T at the Ira Sohn conference a month ago. But frankly, the details were very light in everything I've read -- and remember that very public short-selling schemes don't always stick or play out as planned. Think Bill Ackman and $1 billion Herbalife bet. This headline alone shouldn't scare you off.

Boasting a 5.1% dividend yield and a bunch of negativity priced in after Ira Sohn, with AT&T off 6% in a little over a week, now could it be a decent time to stake out a position in this telecom giant. The forward P/E of AT&T is about 13 after the sell-off.

Though share appreciation admittedly may be hard to come by in AT&T, the yield alone is pretty attractive even if shares move sideways. Oh, and the dividends have increased 44% since 2004 -- so theoretically, 10 years from now you could have a yield on cost of 7.4%. And with payouts at less than 25% of FY2014 earnings, the dividend is not just sustainable but could easily move higher.

BHP Billiton

Why in the world would you mess with a commodity stock like BHP Billiton (BHP) right now? Well, because nobody else wants to -- and the price of this miner is dirt cheap.

For starters, BHP Billiton is trading around $66 a share but hasn't dipped below $60 for more than a few days since July 2009. There is a nice floor right now to encourage entry.

Secondly, the semiannual dividend adds up to about a 3.4% yield. That's a good payout.

Lastly, BHP is a diversified miner that produces aluminum, iron, coal and even oil. This allows for a bit more stability than other miners focused on one specific commodity.

Throw in the weakening Australian dollar and the prospect of higher inflation long term as a tailwind to commodity prices and you have a pretty good case to stake out a position in BHP.

Obviously base metal stocks haven't wowed investors for the last year or two. But they will undoubtedly play a significant role in any global recovery. That means the only reason to not stake out a position in a pick like BHP is because you believe industrial demand will stay weak for years or decades to come.

That's an awfully bleak investing strategy. And frankly, if that proves true you don't have many places to turn, materials or otherwise. Unless you're confident of a collapse, BHP seems a low-risk way to play the recovery over the next few years and collect some nice income in the process.

Johnson & Johnson

Iconic health care company Johnson & Johnson (JNJ) had been dead money for several years up until a big run to start 2013 brought it back into the spotlight. And while shares may be a bit frothy, there's reason to think JNJ is still a great buy even at these levels.

Longtime leader William Weldon stepped down last year after a number of quality-control issues and general management missteps, but new CEO Alex Gorsky seems to be running a tighter ship. After stagnant or declining profits previously, fiscal 2013 earnings are forecast to be up over 40% from 2012 numbers -- and the company is riding three consecutive quarterly increases in revenue, too

The 3.1% dividend yield is substantial, and payouts are triple what they were in 2002, so there's a great chance of future increases; dividends are just 45% of fiscal 2014 earnings forecasts.

Broadly speaking, health care is a great place to be, thanks to the demographics of an aging America. But Johnson & Johnson also has the benefit of both clinical sales as well as consumer-health products like Tylenol and Band-Aids that add stability to shares.

If you're looking for a long-term winner, even near a 52-week high I think JNJ is a great play. And if you can snag it on a mild pullback after its strong 20% run year-to-date, all the better.

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