3 U.S. stocks to buy in 2016 for gains and income

The U.S. economy is growing more quickly. So we continue to focus on U.S. companies that do lots of business at home in addition to their sales abroad. We picked these three U.S. stocks to buy in 2016 for both capital gains and rising dividends.

Last year, we shifted our focus to U.S. companies that generated a good chunk of their sales at home.  That’s because the American economy is doing fairly well. Its economy is expected to have grown by 2.4 per cent in 2015. That’s tied with Britain for first-place in the G7 (the Group of Seven industrialized countries).

Most other big economies are faring less well than the U.S. This includes the Euro-zone (economic growth of 1.5 per cent in 2015), Brazil (economic contraction of 3.1 per cent) and Russia (economic contraction of 3.8 per cent). Of the big economies, only India (economic growth of 7.3 per cent) and China (economic growth of 6.9 per cent) are expected to do better.

Now there’s another reason to focus on American companies that do lots of business in the U.S.: the high U.S. dollar. It reduces the value of sales and earnings generated abroad in foreign currencies. Given this outlook, we again focus on U.S. companies that earn significant profits at home.

2 top dividend stocks for 2016

McDonald’s Corp. (NYSE─MCD) operates, franchises or licenses 36,405 restaurants worldwide. The U.S., however, accounted for 42 per cent of its operating income. McDonald’s did better than expected in the third quarter of 2015. That’s why its share price jumped.

The High-Growth Markets segment, which includes China, did much better. Same-store sales climbed by 8.9 per cent. The impact of an unethical Chinese supplier to McDonald’s is fading after it took corrective actions. Also, same-store sales in the U.S. rose by 0.9 per cent. This was the first increase there in two years. New items and breakfast offerings helped drive up U.S. same-store sales.

In 2015, McDonald’s is expected to earn $4.89 a share. In 2016, it’s expected to earn $5.35 a share, an increase of 9.4 per cent. This dividend aristocrat continues to raise its dividend each year. The current dividend of $3.56 a share yields an attractive 3.1 per cent. McDonald’s also keeps buying back its shares. The shares have momentum and remain on buy.

Paychex Inc. (NASDAQ─PAYX) provides computerized payroll-accounting, salary-deposit, automatic payroll-tax payments, tax return filing as well as human-resource products and services.  Its shares are up by 12 per cent from last year. The company has 590,000 customers. These are mostly small- to medium-sized businesses, with 10 to 200 workers. It’s often easier and cheaper for them to deal with Paychex than to set up departments in house.

In the year to May 31, 2016, Paychex is expected to earn $2.03 a share. That’s up by 9.7 per cent from $1.71 a share last year. Next year, its earnings are expected to climb by 8.4 per cent, to $2.20 a share. With the U.S. economy growing more strongly, we expect more business-creation to take place. Paychex could exceed the current expectations.

Paychex has raised its dividend in recent years. It now pays $1.68 a share, for an attractive yield of over 3.2 per cent. The company also rewards its shareholders by buying back its own shares. That’s little surprise, given that management owns 11.3 per cent of the company.

While Paychex is not cheap, it remains a buy for long-term gains plus high and rising dividends.

Manufacturing stock is a dividend aristocrat

PPG Industries (NYSE─PPG) is a global manufacturer of performance and industrial coatings, optical and specialty materials and auto glass. Even though it operates 155 manufacturing facilities and affiliates in 64 countries, it generates 39 per cent of its sales in the U.S.

In 2015, PPG is expected to earn $5.69 a share, up by a solid 16.6 per cent from $4.88 a share last year. Next year, its earnings are expected to advance by 12.5 per cent, to $6.40 a share.

Thanks to PPG’s strong earnings growth, it has raised its dividend for 44 years in a row. That is, it’s what’s known as a ‘dividend aristocrat’. In the U.S., that’s a company that has raised its dividend for at least 25 consecutive years. Even with the strong rise in the company’s share price, the dividend of $1.44 a share yields a decent 1.5 per cent.

PPG Industries remains a buy for long-term share price gains as well as decent and rising dividends.

 

The Investment Reporter, MPL Communications Inc.
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