BOSTON ( TheStreet) -- The stock-market adage "sell in May and go away" is particularly appropriate this year, given the uncertainties facing investors. The European sovereign debt crisis is dragging on, and the economic recovery is showing signs of stalling out on the home front after a bountiful first quarter.
The "sell in May" strategy is based on the fact that the average gain for the S&P 500 from May to October since 1945 is 1.2%, versus the 6.8% average return for November through April. That leads to the view that sitting on the sidelines for six months each year, beginning May 1, is worth it.
What should make investors particularly apprehensive about the market's performance this May "has been its negative performance in the last two years, serving as a prologue to two severe corrections, punctuated by an 8.2% slump last year, as the 19.4% five-month near-miss bear market got decidedly under way," Sam Stovall, S&P Capital IQ's equity strategist, said in a note Monday.But if you bail out of the market, where do you put your money? Certainly not in certificates of deposits (CDs) with their 1% or less returns. And Treasuries aren't much better with the 10-year note now with a 1.93% yield and the 30-year at 3.11%. And Stovall notes that "investors have to consider the transaction costs and tax consequences of selling. More importantly, they may miss out on an unexpected summertime surge in stock prices" as the S&P 500 gained 14% or more in the May-to-October period in 2009, 2003 and 1997. "Therefore, it would be better to identify more attractive areas in which to invest during this seasonally slow period." So investors may well find the most attractive alternative to be buying shares of some of the highest-quality companies with the best dividend yields. That should result in a group of stocks that will also fit neatly into a retiree's or near-retiree's portfolio. The premise of this strategy is that investors could keep a toe in the market in case there is a spring tide that lifts all the boats, but also stay covered on the downside by going with companies with secure dividend returns that are better than anything they can get in the fixed-income market. With that in mind, I scanned the 46 stocks that Morningstar has as its highest-rated, or "five star," stocks, for those with the best yields. That five-star list, based on a range of fundamentals, is a tough one to crack as Morningstar tracks just over 2,000 stocks. It also provides a "fair value" estimate for prices, based on discounted cash flow, among other factors. It is usually different from the target price of Wall Street analysts, who typically base their price on a forward price-to-earnings multiple that incorporates an estimate of how much other investors are willing to pay for the stock. I found 10 five-star-rated Morningstar stocks with yields of 2.5% or better and they are detailed below, as are their fair-value prices. Foreign telecommunications companies dominate the list, at four. Although they now have relatively poor share-price performances, well off the S&P 500's 12.3% return this year, these companies have steady cash flows stemming from their place in the communication oligopolies within their countries. And their managements are willing to share that cash with investors in the form of dividends. The most tempting stock has got to be semiconductor giant Applied Materials (AMAT), which is up 13% this year and carries a dividend yield of almost 3%. Its industry, the highly cyclical semiconductor sector, is up 18% this year, so it trails its peers. But Morningstar analyst Andy Ng writes that the company "is the chip-equipment industry's standard bearer. The firm has the broadest product portfolio and offers customers the closest thing to a one-stop shop." Here are 10 stocks with Morningstar's highest rating of five stars with at least a 2.5% dividend yield, ranked in inverse order of their Morningstar "fair value" price premium to their current share price:
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