Dividend Watchdog: How Safe Are These 8 Yields?

by: Investment Underground

Continuing our Dividend Watchdog series at Investment Underground, we examined a few dividend stocks. Today, we uncovered 8 stocks with rock solid yields. In today's volatile markets, income investors should take a look at the list below. As always, use the list below as starting point for your own due diligence.

Abbott Labs (NYSE:ABT): Long deemed a "dividend champion" having not only paid but also increased its payouts for 39 straight years. The 3.74% current yield is well above average and the 62% payout ratio suggests future sustainability. In recent years the dividend growth rate has slowly been increasing, from an 8.8% average increase in the 10 year average to the 10.6% average increase in the 3 year average.

It might not be poised for huge growth, but ABT does allow for a strong combination of a high current yield and steadily increasing payouts. If you believe the heath care sector has been left behind, it could be an opportune buy. The company's portfolio of patent protected drugs, along with its excellent nutritional and diagnostic groups and its history of strategic acquisitions, have dug ABT a wide economic moat, which is one of the reasons we think Warren Buffett might buy this stock.

Medtronic (NYSE:MDT) This dominating business produces medical equipment and holds market leading positions in heart devices, insulin pumps, and spinal products.

Known once for its leaning too much on its heart disease business, the company has moved into other therapeutic areas, a good move in our opinion. Shares have appreciated over the past five months since we first wrote about the company here and again where we declared it one of our 10 dividend "kings" here. Medtronic backs up ABT on the "dividend champion" list, having increased payouts for 33 straight years.

This medical device company comes in with a current yield of 2.37%. Not substantial, but there is promise for the future. With a 19% 5 year average dividend growth rate and a likely increase in July, the yield on cost looks to make quick moves. The 30% payout ratio works just fine and if health care revives, MDT could be a solid growth opportunity.

T&T (NYSE:T): This telecom giant is well known to consumers for providing cellular phone service, landline telephony, cable television, and wired Internet. Over the past year, AT&T paid out $1.72 in dividends per share for an incredible 5.67% yield. The great news is that the company still generated $3.51 in EPS and has $5.99 in cash flow per share, more than enough to cover the dividend and ensure stability. Going forward, the dividend is expected to grow at a respectable 5.39% annually over the next five years, so the stock will still be paying a great return for at least a few more years.

AT&T has been making headlines recently with a proposed acquisition of the T-Mobile USA division from its German owner, Deutsche Telekom (OTCQX:DTEGY). Several technology firms such as Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) have voiced support for the deal, while cell phone service competitor Sprint Nextel (NYSE:S) and consumer advocacy groups have opposed. The FCC and FTC will take a while to come to a decision, but in the meantime, AT&T's growth prospects look positive regardless, with a healthy 9.1% increase in earnings expected next quarter and a 7.6% increase next year.

Even before the proposed deal, a quick valuation of AT&T indicates that the dividend alone makes the stock worth much more than its asking price. If the acquisition fails to complete, AT&T will have saved the costs of integrating T-Mobile's infrastructure, employees and customers. If the acquisition is successful, AT&T will be poised for much higher growth through access to more customer markets and capital for new infrastructure, like a 4G LTE network.

Exxon Mobile (NYSE:XOM). XOM is also a "dividend champion," having not only paid but also increased its dividend for 28 straight years. The 2.39% current yield doesn't do much for income investors, but the 25% payout ratio and near 9% five-year average dividend growth rate appear promising. The increase in yield on cost is good for investors as is the potential upside to positive news. If you just want to ride the gas wave to growth, consider Exxon.

We think Exxon's purchase of XTO Energy last year will turn out to be a wise move, given XTO's expansive foot print in natural gas production. It make take a few years for this deal to add significantly to earnings, however.

Comcast (NASDAQ:CMCSA)(CMCSK) Comcast currently yields 1.92%. View the dividend payment history here. In 2010, company revenues grew by 6.10% to $37.93 B, and GAAP EPS rose by 2.38% to $1.29. The EBT margin also improved to 16.09% from 14.28%. The next earnings release is on May 3. For Q1 2011, analysts estimate Comcast will earn $0.34 per share, an increase of 12.76% over Q1 2010, and revenues of $11.8 B, an increase of 27.99% over Q1 2010. With a net margin of 10.3%, Comcast is not only profitable but is more profitable than the Media industry median. The company also has a debt to equity ratio of 0.67. We believe that Comcast will continue to increase revenues at a modest pace, and that it will turn around NBC. We place a price target of $30, and so at these price levels, advising looking into purchasing shares.

Astra-Zeneca PLC (NYSE:AZN). The large pharmaceutical company, with a market cap of $65.09B, is currently trading at a P/E of 8.00. The company could benefit from radiation treatment in Japan through Ethyol, a prescription drug by MedImmune, which is owned by AZN.

On the other hand, the company recently agreed to pay $68.5 million in a settlement with the government over alleged improper marketing of its drug Seroquel.

Procter & Gamble (NYSE:PG). PG is a powerhouse on the "dividend champion" scene, having increased its payouts for 54 straight years. The 3.29% current yield is reasonable, but might get even better in the next month. PG looks to mirror IBM with an expected 10% increase to yield on cost. The 48% payout ratio appears to be in line for this consistent consumer goods company.

A near 12% average five-year dividend growth rate, coupled with the expected upcoming dividend increase announcement, make PG a play that everyone can see.

Verizon Communications (NYSE:VZ): Verizon is one of the main competitors to AT&T in landline multimedia services, as well as the largest competitor in the cell phone service market. The stock's $1.95 in dividends this year made for an impressive 5.54% return on equity. One worry is that the dividend paid was greater than the EPS of $1.25, so that the dividend won't be sustainable. However, the company has plenty of cash flow to cover the dividend. Further, over the next five years, earnings are projected to grow at 8.62% per year-- more than twice the 3.51% rate of dividend growth.

Verizon has been ahead of the game in several emerging markets throughout the U.S. Its wireless phone division-- which has the largest number of subscribers-- has already started implementing a 4G LTE network, and now also sells the Apple (NASDAQ:AAPL) iPhone which used to be exclusive to AT&T in the U.S. Verizon FiOS, offering fiber optic television, Internet and telephone service in homes, is also highly successful and expanding rapidly. Accounting for all this potential, VZ has an attractive forward P/E ratio of 13.48 and a PE/G of 1.86, better than the industry average. That means this stock has the great combination of a high dividend return along with an undervalued price going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.