Wednesday, December 29, 2010

Best Dividend Stocks for 2011

Back in 2008 I was invited to participate in a friendly competition with several stock bloggers. My list of stocks has returned over 20% in 2009 and 2010. The companies I selected in both years included real estate investment trust Realty Income (O). utility Con Edison (ED), tobacco conglomerate Phillip Morris International (PM) and pipeline MLP Kinder Morgan Partners (KMP). Due to the low interest rates, most high yield stocks have been bid up by yield hungry investors to levels which would make investors think twice before adding new money to these positions.

Instead, I have selected four new stocks, which are attractively priced at the moment and could deliver solid earnings growth over the next few years. Dividend growth investing is all about finding the companies which are best positioned to increase dividends over the long haul. Companies with rising sales and earnings have to strong fundamental foundation that would lead to higher dividends over time and higher stocks prices as well. The best dividend stocks for 2011 include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company has had issues with product recalls in 2010, which is one of the reasons why the stock was flat this year. The diversified product base and global geographic reach of its products which are used by consumers on a daily basis produces a diversified stream of sustainable cash flow, which should enable the company to withstand any storms successfully. The company tries to grow organically through innovation and investment in R&D, as well as through strategic acquisitions in new opportunities such as vaccines or biosurgical products. Johnson & Johnson is a member of the dividend aristocrats index, and has consistently raised distributions for the past 48 years. Yield: (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company is expected to grow earnings in the high single to low double digits over the next few years. It has a diverse base of consumer products, which consumers’ worldwide use on a daily basis. Tapping the growing emerging market middle class is a major opportunity for the company. Procter & Gamble is a member of the dividend aristocrats index, and has consistently raised distributions for the past 54 years. Yield: (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. While the use of tobacco products is declining in the developed world, emerging market demand is on the increase. In addition, prices typically increase at a rate, which is faster than the rate of decrease in demand. This has translated into higher profits for companies like Philip Morris International, whose branded cigarettes are preferred by consumers worldwide. The company plans to grow organically through innovation of packaging and product lines and through strategic acquisitions. It has raised dividends three times since it was spun off from Altria Group (MO) in 2008. Yield: (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). Earnings growth could come from synergies associated with the acquisitions of its bottlers, streamlining of operations and cost cutting. The distribution networks of the bottlers acquired could be used to push some of PepsiCo’s non-beverage products such as snacks and other foods.Earnings growth could also come from strategic acquisitions, as well as product innovations in health and wellness food and beverage section. PepsiCo is a member of the dividend aristocrats index, and has consistently raised distributions for the past 38 years. Yield: (analysis)

The common characteristic of these stocks is that they have a diverse product base and a global market reach. In addition to that they have strong brand names, which ensures that their products carry a premium value to consumers and makes them less likely to switch based on cost. This allows these companies generate high returns on equity and to shower stockholders with cash in the form of dividends and share buybacks. While these stocks are greatly positioned to benefit from the continued economic expansion in the world, they should do well even if we get a double dip recession, since their products or services are used by consumers on a daily basis.

In order to generate sustainable dividend income for the long run however, a more diversified portfolio consisting of at least 30 stocks should be constructed in order to withstand market forces. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post. I will be adding the picks from the other bloggers as they are posted.

The stock picks from the other bloggers along with their 2010 performance include:

The Wild Investor +27.15%

Where does all my Money go 26.56%

Dividend Growth Investor +26.08%

Zach Stocks +20.87%

My Traders Journal 10.39%

Million Dollar Journey 3.79%

Intelligent Speculator -0.45%

The Financial Blogger -1.64%

Four Pillars -35.25%

Full Disclosure: Long JNJ, PG, PM and PEP

Relevant Articles:

- Dividend Aristocrats list for 2011
- Ten Dividend Stocks with High Returns on Equity
- Strong Brands Grow Dividends
- Dividends versus Share Buybacks/Stock repurchases

This article was included in the Carnival of Personal Finance: 2011 New Year's Resolution Edition

5 comments:

  1. DGI,

    Excellent post.

    You may have already mentioned this previously, but Warren Buffett increased his JNJ position in 3Q10. I agree with you that it's a buy and plan on picking up some more.

    Thanks for keeping up your insightful blog. Happy New Year!

    ReplyDelete
  2. I have a question. Just curious as to why you would by PM vs MO?

    Thanks

    ReplyDelete
  3. This blog is the most useful for me and your have shared very good information and view in your blog and i got a lot of valuable thing from your blog.
    I want to thanks for sharing.

    ReplyDelete
  4. Awesome post and overview of these heavy hitters.

    What about ABT? It's been beaten up unnecessarily, it could come back over 20% this year.

    ReplyDelete
  5. Hi, DVG,

    This is a good list. I like the way you think. I do have to wonder, however, why you've left off both REITs and Master Limited Partnerships?

    Strong consumer brands should do well if the economy stays in a recession and even better if it does recover.

    But why take the time to analyze individual companies? Life is too short to try to predict the unpredictable future. You like dividend aristocrats. Great. Buy SDY.

    Master Limited Partnerships are the one exception because they are not suited to the ETF structure. The closed end funds buying them use leverage (too risky for me). So it's necessary to buy them individually, but still best to get as broad a range of midstream MLPs as you can afford. Kinder Morgan is one of the best, but you can't predict the future.

    Utilities may not be yielding as much as other stocks now, but they're still dependable. People need to pay light, gas and water bills.

    We should shut up. I'd prefer to see people continue to chase the capital gains pipe dream and drive up the prices of stocks that don't pay dividends, so those that do remain cheap, so I can buy more shares when I reinvest dividends.

    Rick

    Capital Shopping Centres Group

    ReplyDelete

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