Nestle and PepsiCo: 'Cheap and Safe'

"The envy of every other processed-food maker in the world, Swiss-based Nestle boasts top-of-class manufacturing and marketing. The company offers a a widely diversified product line-from chocolates and cocoa to milk products, juices, coffees and teas, pasta, seasonings and frozen entrees.

"The stock, a true long-distance thoroughbred, has more than doubled in the past 10 years, compared with a miserly 12% increase in the Dow.

"Yet NSRGY finds itself today about 8% below its December peak. You're getting a rare discount on a premium franchise. Current yield: 3.5%.

"More than just an all-American soft-drink company, PEP also produces snacks (Lays, Doritos) and breakfast cereal (Quaker Oats).

"Like most food makers, Pepsico has faced a margin squeeze lately, thanks to the steep run-up in commodity prices.

"Eventually, however, I'm confident PEP will manage to do what it has done ever since 1898-raise prices enough on its finished products to recoup input costs.

"Meanwhile, at 14X estimated 2011 earnings, the shares are trading 35% below the valuation the fetched at the October 2007 market top.

"PEP also yields 3%, half again as much as the S&P 500, with a record of 38 annual dividend increases in a row.

"A stock this cheap should easily outpace the broad market indexes over the next 10 years-just as it has done over the past 10.

"At the moment, Wall Street isn't paying much attention to these staples stocks. They're quietly sitting on the shelf, churning out steadily higher sales and profits, and throwing off good dividends.

"When the market catches its next whiff of fear, though (for whatever reason), you can be sure investors will come running back to the staples. We want to be there, ready to welcome the crowd home!

"What to do now: Buy NSRGY at $55 or less and PEP at $66 or less. Like most U.S. corporations, Pepsi pays quarterly dividends; Nestle pays on an annual schedule, usually in the second half of April.

"Because Nestle deducts 15% Swiss withholding tax from your dividend check, I recommend holding the stock in a taxable (non- IRA) account, so you can reclaim the tax as a credit on your U.S. Form 1040."

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