Last year we highlighted McDonald’s (MCD) as our top Dow stock for dividend investors in 2010. McDonald’s stock price finished the year up 22.5% which easily exceeded the 11% gain in the Dow Jones index. When you included their dividends, investors in McDonald’s realized a 27% gain in 2010.
As a dividend investor, I will take a 27% return from a blue chip stock any year.
Of course 2011 is a new year and it’s not that I no longer like McDonald’s, because it’s still a great dividend stock. However, MCD shares are not nearly as cheap as they once were and the upside appears to be more limited in 2011.
So it time to look for a new top Dow dividend stock for 2011 and the pick may surprise some investors.
Our top Dow dividend stock for 2011 is Merck (MRK). Sure Merck was the antithesis of McDonald’s in 2010 when the pharmaceutical stock dropped 1.4%. And they certainly won’t be one of the top growth stocks for 2011 with revenues expected to breakeven at best. However, Merck appears poised to reward investors in 2011.
Merck shares currently trade at only 9.5x consensus 2011 earnings. While that is a premium to competitor Pfizer’s (PFE) 7.5x multiple, Merck is expected to grow their earnings by 13% next year. Pfizer is only expected to generate a modest 3% growth in net earnings.
The acquisition of Schering-Plough in 2009 has helped Merck rebuild its product pipeline. Merck now has several drugs in late-stage trials which could prove to be the compelling buy catalyst for the stock in the second half of 2011.
Wall Street analysts are fairly bullish on Merck as well. The pharmaceutical stock has a consensus price target of $42. While price targets are generally unreliable, it does indicate that Wall Street sees nearly 20% upside in Merck shares as we start 2011.
Maybe most importantly for dividend investors, Merck offers an impressive 4.2% dividend yield. That makes it the 3rd highest yielding stock in the Dow Jones index and could greatly enhance Merck’s total return in 2011.
There is also an outside chance for a dividend increase from Merck in 2011. Merck hasn’t increased their dividend since 2004, but improving product forecasts and strong cash flows could lead to a surprise dividend announcement in 2011.
For investors looking to follow a Dow 10 strategy this year, Merck is a must-have stock in your portfolio. However, we see Merck as a safe stock in 2011 and one that is likely to outperform the broader market indices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
