10 U.S. Dividend Stocks to Hold or Buy for Yield

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 |  Includes: AVP, DUK, EXC, KMB, MO, MRK, NUE, PFE, SO, VZ
by: Dutch Trader

In my fourth and last article about dividend stocks, I ran a screen with high-yield stocks that have a hold recommendation, but at least a dividend yield of 4%.

Company
Price
Sector

YTD (%)

2011 P/E

2012 P/E

Yield

Altria Group

25,7

Consumer Staples

4,4
12,4
11,5
6,2

Verizon Communications

35,07
Telecommunication
-2
15,3
13,1
5,7

Duke Energy

18,37
Utilities
3,1
12,9
12,6
5,6
Exelon
41,92
Utilities
0,7
9,8
13,6
5,2

Merck & Co.

31,06

Health Care

-13,8
8,4
8,1
4,9

Southern Co.

40,21
Utilities
5,2
15,4
14,5
4,8

Pfizer Inc.

17,71

Health Care

1,1
8
7,9
4,5

Avon Products

20,96

Consumer Staples

-27,9
10,3
9,2
4,4
Kimberly-Clark
65,59

Consumer Staples

4
13,4
12,4
4,3
Nucor
31,98
Materials
-27
12,5
9,4
4,2
Click to enlarge

Altria Group (NYSE:MO)

Q2 earnings met expectations. However, the top-line miss indicates that Altria’s pricing could be a bit weaker than anticipated. Moreover, market share losses -- the third quarter in a row -- should draw investors’ attention and thus weigh on the stock. On the other hand, its 6.2% dividend yield should provide downside protection in the shares. In the tobacco industry there are better choices: Both Philip Morris International (NYSE:PM) and British American Tobacco (NYSEMKT:BTI) have a broad market diversification and are considered a buy.

Verizon Communications (NYSE:VZ)

Q2 results were solid concerning headline figures. But the market is looking at wireless trends, where VZ did not exceed market expectations. Overall customer growth was good; consensus factored in an accelerating trend concerning the important smartphone penetration, but the share of new postpaid smartphone customers stagnated at 60% in Q2. VZ indicated that smartphone penetration (including iPhone) will not reach 50% of postpaid base until Q1 2012, later than originally expected. Despite heavy marketing efforts, the much-anticipated iPhone activations were 1.2 million lower than at rival AT&T. Wireline, on the other hand, is making good progress to return to revenue growth in the second half.

Duke Energy (NYSE:DUK)

Duke reported solid Q2 results somewhat better than expected, and is on track to reach its full-year targets. Concerning the planned merger with Progress Energy, the company received some approvals, but several are still pending and Duke continued to expect to close the deal by year's end.

Moderate growth on a standalone basis could improve somewhat, helped by merger benefits, however some uncertainties (several rate cases ahead, unclear cost recovery for Edwardsport power station, merger outcome) remain.

Exelon (NYSE:EXC)

Exelon’s Q2 EPS beat consensus but included 7 to 10 cents of one-time items. Taking the latter into consideration, EPS was in line with market expectations, and the guidance increase is less convincing.

Earnings got help from higher realized prices in the mid-Atlantic region, due to the expiration of power purchase agreements and rate increases, which were partly offset by lower nuclear volume and higher operating and maintenance costs. 2011 looks solid but the negative swing next year remains. In 2012, earnings will fall more than 20%, driven by weaker gross margins at the generation, business related to hedging at low prices. Earnings chould recover in 2013 but will not be meaningful without a significant recovery in electricity prices or greater upside from the purchase of Constellation. Concerning the latter, Exelon still expects the deal to be closed in Q1 2012.

Merck (NYSE:MRK)

Cost-cutting is good for shareholders as margins are protected, but if R&D is not yielding much and staff is to be cut on top of this, what is left is a shell with a lot of cash in it. As with other pharmaceuticals, Merck is going to suffer from the beginning patent cliff, with no new drugs to compensate for this shortfall much in the year ahead.

A better strategy would have been to go for new products and buy a large biotech company. This way, cost cuts will keep shareholders happy for a while, and management occupied. But valuations of interesting biotech targets are moving up, and the selection is getting smaller.

Merck shares can be held for yield (at now some 4.9% prospective for 2011), but otherwise there is not much to look forward to here on the business level.

Southern Company (NYSE:SO)

Southern reported good Q2 results ahead of consensus. The quarter benefited from good industrial demand and favorable weather. On a weather-adjusted basis industrial volumes gained 3.5%, and the company remained optimistic that the continued strength will translate to recovery in the residential and commercial segments. Guidance for 2011 was confirmed, and based on the first half, it seems likely that Southern will reach the top end of the range. Concerning the construction of Vogtle 3 and Vogtle 4 nuclear plants, Southern said that granting of the operating licence could be delayed into 2012. However, the company says this would have only limited construction delays.

Overall, Southern offers solid perspectives, already priced in, as the stock shows a double-digit valuation premium to its U.S. peers.

Pfizer (NYSE:PFE)

Pfizer put their Wyeth baby formula business up for sale in July. Both Nestlé and Danone are eager to expand in emerging regions and in the baby food segment. Pfizer's Wyeth baby formula business is worth up to $10 billion.

Q2 results were nothing to get too excited about. Cost-cutting and divestments go on, and what will be left is anyone's guess, though certainly a lot of cash for now.

Again, a large acquisition in biotech is needed, but not aspired to by the new CEO, who is very much an R&D man and wants to prove that Pfizer can get there by itself. At least he keeps an eye on the costs.

Avon Products (NYSE:AVP)

The company unveiled a new strategy aimed at improving the ever-underperforming U.S. business. But given repeated efforts and failures in previous years, we think it is understandable that investors will remain sceptical.

Another depressing point is the struggling performance in China. Although this country accounts for only 3% of group sales, the momentum there is important for the stock given its huge market size. The restructuring process, which began about two years ago, has been yielding nothing!

Avon’s persisting problems in the U.S. lead to questions about the direct-selling retail channel in developed markets. The rapidly increasing popularity of the online sales could prove a structural threat for the direct-selling channel.

Operating results aside, Avon’s cheap valuation should give some support. Trading at a 12-month forward P/E of around 10x, the stock is valued about 38% below its 10-year average, and about 22% below its international peers.

Kimberly-Clark (NYSE:KMB)

KMB reported relatively solid Q2 results in a very difficult commodity environment. The company had already cut its EPS guidance for 2011 related to its high commodity exposure. The statement to finalize the year at the lower end of EPS guidance creates additional downside risk. It remains uncertain whether KMB will be able to offset input cost pressure.

Nucor (NYSE:NUE)

Although Nucor reported much better than expected EPS, its muted forecast for the third quarter will likely keep EPS estimates for 2011 -- and probably 2012 -- unchanged. Visibility remains foggy, but with an estimated dividend yield of 4.2% as well as their solid balance sheet, the share price offers some strong support.

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