The Last Stocks Our Experts Ever Would Sell (Part 2)

At mid-week last week, there were 240 holdings spread out among a dozen real-money and model portfolios in the various StreetAuthority advisories. Nearly 70% of these stocks were in positive territory. To put it in the parlance of a daily stock market update, the winners outnumbered the losers by more than two to one.

In this previous article, two of our premium Investment Strategists told you about their absolute favorite stocks in any market. Now, here’s part two, courtesy of StreetAuthority Co-Founder Paul Tracy, who edits our Top 10 Stocks advisory, and Amy Calistri, editor of The Daily Paycheck. (Stay tuned for part 3, courtesy of Carla Pasternak, editor of High-Yield Investing.)

The following stocks are among the cream of that crop…

Paul Tracy, Top 10 Stocks

Cisco Systems (Nasdaq: CSCO) is the perfect example of what can happen when investors worry about “the market” instead of focusing on owning great businesses.

Three months ago, Cisco’s shares soared 10% in a single day following its quarterly earnings announcement and a 75% increase in its quarterly dividend.

But then people started to worry about a slowdown in Europe… or the “fiscal cliff”… or that the market was falling. Frankly, who knows?#-ad_banner-#

But I can tell you that they weren’t focused on the unstoppable trend of increasing Internet usage around the world. Internet traffic is set to quadruple by 2016. And they weren’t focused on the fact that Cisco serves as the “backbone” of the Internet thanks to its supply of routers and switches.

And they weren’t focused on the fact that Cisco has posted record revenue in each of the past three years… or that it has increased its dividend 133% in less than a year… or that it has $45 billion in cash on its books (equal to about $9 per share)… or that thanks to buybacks, the company’s shares outstanding have fallen 21% since 2004.

In fact, since Cisco announced its earnings and increased the dividend in August, the shares had fallen 15% from their peak. It made no sense.

Hopefully that’s now changed. A couple of weeks ago, the company announced its latest earnings. Sales rose 6% year-over-year, while net income rose 18%. Cisco also returned $1 billion to investors during the quarter via buybacks and dividends.

The stock soared 5% the day after the announcement… a day in which the overall market fell 1.5%. So in the course of three months, investors saw the stock soar 10% in a single day on the heels of a great quarter and a massive dividend increase, only to fall alongside the market, and then soar 5% again with the next earnings announcement.

If you’ve ever needed proof that the best way to invest is to focus on an actual business — and not all the other “noise” and bumps in the road that have little or no bearing on its future — I hope Cisco serves as an example.

Action to Take –> The company continues to do everything a great business should — dominate its growing market, pay increasing dividends and buy back shares. At these prices, I still consider the stock one of the market’s best values.

Amy Calistri, The Daily Paycheck

One of the engines that drives my Daily Paycheck portfolio is compound growth. By reinvesting dividends, I can hold safer and less volatile securities — yet still achieve the same growth as the overall market.

If I hold securities that increase their dividends over time, my growth compounds even more quickly.

One of my very first purchases for The Daily Paycheck portfolio back in December 2009 was AT&T (NYSE: T). I still own it today and it is a stock I can see holding for the next 10 years. When it comes to dividend growth, it’s hard to beat AT&T’s track record. In November, AT&T raised its annual dividend for the twenty-ninth consecutive year.

Cellphones were once considered a luxury. Now, wireless phone service is considered more of a necessity than a dishwasher or TV. This accounts for why wireless providers tend to be more resilient in economic downturns. And in better times, consumers upgrade their phones to take advantage of more broadband-intensive services such as video and music.

AT&T was founded in 1885 shortly after Alexander Graham Bell invented the telephone. Today, it is the largest telecommunications holding company in the world by revenue. It has the largest 4G network — the most advanced wireless technology — serving more than 100 million wireless customers in the United States.

Action to take –> I always envision holding AT&T in my Daily Paycheck portfolio. Yet, there may be a particularly good buying opportunity in the month ahead. The dividend tax rate may be allowed to increase as a result of the ongoing budget negotiations in Congress. As a result, there could be a temporary sell-off in dividend stocks such as AT&T. This, in turn, could allow investors to lock into a lower price — and a higher yield — for one of the most dependable income producers in the market.

Carla Pasternak, High-Yield Investing

To make money as an income investor, you must pick stocks that can be held for the long term — as long as the fundamentals remain strong and the environment is favorable.

Case in point: Magellan Midstream Partners (NYSE: MMP), which owns the longest refined petroleum product pipeline system in the United States.

The partnership has not missed a distribution since starting payouts in 2001. In fact, distributions have been hiked every quarter, except for five quarters when they remained stable in the aftermath of the 2008 financial crisis. Distributions have grown at a robust average of 7% a year for the past five years.

I love equities like Magellan that grow their distributions because that allows you to increase your yield-on-cost, the current dividend rate as a fraction of your purchase price. If you bought the units when I did back in September 2005 for High-Yield Investing, then you would enjoy a stunning yield-on-cost of better than 11%. If you’re a new investor, then you shouldn’t need to wait a long time to achieve a similar yield-on-cost. Management is targeting 18% distribution growth in 2012 and a further 10% distribution growth in 2013.

Moreover, distributions are secured by stable, fee-based businesses that account for around 85% of operating margins. That leaves only roughly 15% of profits exposed to volatile commodity prices, and the company has a hedging program in place. Revenues are also tied to government-regulated pipeline tariffs, which have built-in inflation clauses.

Management projects another record year in 2013 as expansion projects come online. The partnership will also benefit from a 6.6% increase in pipeline tariffs on July 1, 2012.

Magellan was one of my first High-Yield Investing portfolio additions. In just over seven years, I’m ahead by about 220%. Of these returns, roughly 60 percentage points come from dividends and 160 percentage points from price gains.

Action to Take –> Magellan’s dividend growth track record, long-range capital expenditure plans, and tight hold over essential energy infrastructure all bode well for continued gains in the years ahead.