Time to Get Into Rock Solid Large Cap Dividend Payers

If you've missed the point of the last 2 weeks of market action, let me get you up to date:  2014 is going to be rough, really rough.  We're going to need to go back to the defensive playbooks we haven't used for 4 years, but which saw us through great profits at relatively little risk.  We need to go back to 2009.  

You know I am a commodity guy and I've written recently about the continued weakness of base metals, particularly copper and zinc, and coal, commodities I consider crucial indicators of a continuing robust recovery.  

Look at the worst performing stocks of the last two years and they are almost all commodity names, particularly coal and copper names - Peabody (BTU), Alpha Natural Resources (ANR), Vale (VALE), Freeport (FCX) - I could go on.  So what is the difference today and why am I turning so defensive on the market?  Commodity strength becomes that much more of a factor, precisely because Fed activity is beginnings its taper and strong stock index results last year seemed to 'borrow' gains from our current year.  

But with dropping share prices, and concurrent dropping bond yields, we're looking at another 2009 scenario where dividend producers represent such a sharp arbitrage opportunity.  And it's with bond-like stocks were going to find our best ideas now.  

Now's the time to give up, and I mean entirely, on high-beta names for the near term - the reports and performance today of Twitter and Pandora should tell you something, even if you're a singularly energy-centric analyst like I am.  No, it's time to get into rock solid large cap dividend payers, just like the scary moments after the financial crisis of 2008.  

The names that worked so well then aren't available now, however.  We can't find solid 5-6% dividend returns in the shares of McDonald's (MCD), or Kimberly-Clark (KMB), or 3M (MMM).  But in the energy space, because of a brutal January, there are a few equally good opportunities emerging.  Let me suggest two.  

BP:  This is by far and away the most undervalued major.  Even with a David Einhorn inspired rally today, BP delivers a solid, absolutely rock solid 5% dividend.  While focus remains on the Deepwater Horizon disaster and the continuing liabilities associated with those settlements, BP has written down all but the most worst-case scenario of Federal and Civil liabilities.  Please, sell BP down some more; I'd love to get more shares with an implied 5 ½ or 6% divvy.  I can't see it happening (another similar idea: Exxon-Mobil (XOM).

Transocean (RIG):  This one deserves two columns all its own, but suffice to say that the entire deep-water drilling sector is in the midst of a disaster cycle, with on-shore drilling costing less and returning more right at the time that many of these offshore servicers have new (and massively expensive) new rigs coming on line and looking for work. Day rates are plummeting and some providers are not going to make it to the next up cycle (which might be 2 years away) - yes, I'm talking to you Seadrill (SDRL).  

But that's not Transocean.  Their contract book looks solid and their 4.6% dividend completely sustainable - cash flow remains positive even in this declining day rate environment.  Oil at $100 a barrel is a fantastic impetus to return to big offshore deep-water projects and with global stockpiles of oil at lows not seen since 2003, we're likely to see a return to those projects a lot sooner than most analysts think.  

Like BP, this isn't a blanket recommendation of offshore players - please stay away from Seadrill (SDRL), Noble Corp (NE), Diamond Offshore (DO) and so many others. But like BP, there are a few select opportunities in the sector (another good idea: Ensco (ESV).  

Back to the 2009 game plan:  Dividend payers.