10 Stocks to Buy in May and Go Away

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:

10. KDDI ( KDDIY)

Company profile: KDDI, with a market value of $28 billion, is Japan's second-largest provider of mobile-communications services and sells mobile devices. It is also a broadband services provider.

Dividend Yield: 2.5%

Investor takeaway: Its shares are up 1% this year. The Japanese company gets no Wall Street analyst coverage, but S&P has a "strong buy" rating on its shares.

Morningstar says its "market share of new subscribers has increased over the past 18 months, as it has introduced a new handset lineup of smartphones." Morningstar's fair value of $24 is a 48% premium to the current price.

9. Koninklijke KPN ( KKPNY)

Company profile: "Royal" KPN, ith a market value of $13 billion, is the national telecommunications provider for the Netherlands, offering fixed-line, wireless and broadband services. It also provides wireless service in Germany and Belgium.

Dividend Yield: 13.86%

Investor takeaway: Its shares are down 17% this year and have a three-year average annual decline of 0.85%. Analysts give its shares two "buy" ratings, and one "buy/hold," according to a survey of analysts by S&P. Morningstar fair value: $14, a 55% premium to the current price.

8. Applied Materials ( AMAT)

Company profile: Applied Materials, with a market value of $16 billion, is the world's largest supplier of semiconductor-manufacturing equipment.

Dividend Yield: 2.99%

Investor takeaway: Its shares are up 13% this year and have a three-year, average annual return of 3.6%. Analysts give its shares six "buy" ratings, four "buy/holds," 12 "holds," and two "weak holds," according to a survey of analysts by S&P.

S&P has it rated "strong buy" with a $17 price target, a 42% premium to the current price. Morningstar fair value: $19, a 58% premium to the current price.

7. Staples ( SPLS)

Company profile: Staples, with a market value of $11 billion, is the world's leading office-products company, with $25 billion in sales and more than 2,000 stores in 25 countries.

Dividend Yield: 2.79%

Investor takeaway: Its shares are up 14% this year and have a three-year, average annual decline of 7.7%. Analysts give its shares seven "buy" ratings, five "buy/holds," seven "holds," and two "weak holds," according to a survey of analysts by S&P. Analysts estimate it will earn $1.50 per share this fiscal year and that that will grow 9% to $1.63 per share next year.

S&P has it rated "buy" with a $20 price target, a 27% premium to the current price. Morningstar's fair value estimate is $25, a 62% premium.

6. Steel Dynamics ( STLD)

Company profile: Steel Dynamics, with a market value of $2.8 billion, is a major U.S. steel producer that uses scrap metal as its primary source of raw material, which lowers operating leverage and increases flexibility in its operations

Dividend Yield: 3.07%

Investor takeaway: Its shares are down 2.3% this year and have a three-year, average annual decline of 7%. Analysts give its shares three "buy" ratings, three "buy/holds," and two "holds," according to a survey of analysts by S&P. Analysts estimate it will earn $2.07 per share this year and that that will grow by 18% to $2.45 per share, next year.

S&P says: "For 2012, we project a 7% increase in steel consumption (worldwide), versus 2011's advance of 12.2%," and that will translate to higher profits for this company. Morningstar fair value: $22, a 71% premium to the current price.

5. NTT DoCoMo ( DCM)

Company profile: NTT DoCoMo, with a market value of $71 billion, is the largest wireless telephone operator in Japan, with about a 48% market share. As of March 31, 2011, it had about 58 million cellular subscribers.

Dividend Yield: 3.95%

Investor takeaway: Its shares are down 7% this year, but have a three-year, average annual return of 10%.

Morningstar analysts say: "For a phone company, it has a great balance sheet, with a net cash position," which means low debt. "This is almost unheard of for a large phone company." Morningstar fair value: $30, a 75% premium to the current price.

4. Supervalu ( SVU)

Company profile: Supervalu, with a market value of $1.3 billion, is one of the nation's largest food wholesalers and retailers.

Dividend Yield: 5.7%

Investor takeaway: Its shares are down 23% this year and have a three-year, average annual decline of 22%. Analysts give its shares two "buy" ratings, one "buy/hold," 13 "holds," and three "sells," according to a survey of analysts by S&P. Those same analysts estimate it will earn $1.31 per share in its current fiscal year and that that will grow by 5% to $1.37 the following year.

S&P, which has it rated "hold," says "the company will experience same-store sales growth below its closest peers in fiscal 2013, despite what we consider its strong regional market share positions. We remain cautious on the shares, with sales pressures intensifying."

Morningstar fair value: $12, a 101% premium to the current price.

3. France Telecom ( FTE)

Company profile: France Telecom, with a market value of $37 billion, is France's national phone company, which accounts for about half its revenue, split among wireless (46%), fixed line (33%) and other carrier services. It also has international businesses.

Dividend Yield: 12.82%

Investor takeaway: Its shares are down 11% this year and have a three-year, average annual decline of 4.8%. Analysts give its shares one "buy" ratings, one "buy/hold," two "holds," and one "sell," according to a survey of analysts by S&P.

S&P has it rated "buy," with a $19 price target, a 36% premium to the current price. Morningstar fair value: $28, a 102% premium.

2. Alumina ( AWC)

Company profile: Alumina, with a market value of $3 billion, owns a 40% stake in Alcoa World Alumina and Chemicals, or AWAC, the world's largest alumina producer. Alcoa ( AA) owns the 60% balance. AWAC is involved in bauxite mining and alumina refining.

Dividend Yield: 4.91%

Investor takeaway: Its shares are up 7.8% this year and have a three-year, average annual return of 6%. Analysts give its shares two "buy" ratings, and one "buy/hold," according to a survey of analysts by S&P. Morningstar fair value: $10, a 109% premium to the current price.

1. ArcelorMittal ( MT)

Company profile: ArcelorMittal, with a market value of $27 billion, is the world's biggest steel producer with operations in 20 countries and a presence in all major steel markets.

Dividend Yield: 3.62%

Investor takeaway: Its shares are down 2.3% this year and have a three-year, average annual decline of 7%. Analysts give its shares three "buy" ratings, three "buy/holds," and two "holds," according to a survey of analysts by S&P. Morningstar fair value: $48, a 176% premium.

>>To see these stocks in action, visit the 10 Stocks to Buy in May and Go Away portfolio on Stockpickr.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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