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For many of us, having a passive flow of income is essential. Given the near-zero interest rates on savings and bonds, I do not think it is a good idea to invest in fixed-income securities for a while. We haven't seen the inflationary effects of the quantitative easing policies yet, but inflation will probably be higher in the near future. Devaluation hurts the real purchasing power of money. Consequently, any inflation rate that is higher than the bond interests will result in negative returns for the bond holders.

When it comes to the choice of fixed-income securities vs. dividend income, the contemporary market conditions are in favor of high dividend stocks. You would not be interested in near-zero returns, which cannot provide enough protection against inflation. Companies can reflect higher costs to their final products as higher prices, which will subsequently transform into higher profits and higher dividends. Even if the markets head to the south, dividends can provide a soft cushion against capital losses. In fact, high-dividend companies tend to be pretty defensive with very low Beta values. Acquiring shares in high-dividend companies with strong financials can provide a passive flow of inflation-protected income.

Therefore, I looked for 6 dividend stocks for strong income in 2012. I tried to keep the list as diversified as possible, looking for well-known companies in each sector. I rate three of them as buy, and three of them as hold. I have analyzed these stocks from a fundamental perspective, adding my O-Metrix grading system where applicable:

Stock Name

O-Metrix Score

Fair-Value Range

My Take

General Electric

6.80

$23 - $35

Buy

Intel

7.20

$35 - $45

Buy

E.I. DuPont

5.40

$55 - $68

Buy

McDonald's

3.54

$80 - $92

Hold

Abbott

4.17

$56- $71

Hold

AT & T

3.51

$25 - $44

Hold

Data from Finviz/Morningstar and is current as of December 23. You can download the O-Metrix calculator here.

Buy Ideas

General Electric (GE) is one of the oldest companies in the U.S. history. Established in 1890 by the world famous inventor Thomas Edison, General Electric has become a conglomerate that is involved in several businesses. Its energy infrastructure business operates different energy production systems ranging from wind, gas, or steam-powered generators to nuclear reactors. This segment is also involved in production of technical tools for oil and gas extraction. The aviation segment provides high-tech engines for the aviation industry. Healthcare segment is involved in biomedical sciences, and drug exploration. Transportation segment produces equipment for this industry. The home and business solutions segment manufactures home appliances. I think all of the above segments are doing fine.

But the GE Capital segment suffered significant losses over the past decade. I think it is the existence of General Electric's financial arm that keeps the stock depressed. The stock lost near 80% of its market cap during the sub-prime crises. Since then, we observed a recovery, but GE is still trading at less than half of its pre-crises valuation. Surely, the trailing EPS of $1.22 is much lower than the 2007 EPS of $2.18, but the company is at a recovery stage. Earnings increased by as much as 30% in 2011 to near $13 billion. GE is also steadily increasing its dividends. Quarterly dividends per share increased to $0.17 in the last quarter, which is 2 cents higher than the previous quarter dividend. With a low payout of 48%, the yield of 3.84% looks pretty safe. Based on 13.7% EPS growth estimate, my fair-value range for GE is $23 - $35. Therefore, I rate it as a buy with strong upside potential. Its O-Metrix score of 6.81 is also well-above average. (Full analysis, here)

Intel (INTC)

Intel has been an outperformer in 2011, returning near 16% since January. This year had been a great one for the company. Intel was able to boost its earnings by 160%, creating a net income of $12.7 billion from sales of $51.6 billion.

Since the burst of the techno-bubble, most technology companies have stayed in the undervalued territory, and Intel is no exception. The stock is trading at near single digit P/E ratio of 10.25. Actually, the forward P/E ratio falls in to a single digit number. With a low payout ratio of 30%, Intel offers a yield of 3.55%.

Based on 11% EPS growth estimate my fair-value range for INTC is $35 - $44. Therefore, I rate it as a buy with strong upside potential. Its O-Metrix score of 7.22 is also well-above average.

E.I. DuPont (DD)

Established in 1802, DuPont has a history of more than 2 centuries. The diversified basic material company is the conglomerate of the chemical industry. It operates in several segments around the world. DuPont was able to boost its earnings by 70% in this year, but the year to date return was in the negative territory.

DuPont is trading at an attractive trailing P/E ratio of 12.28 and forward P/E ratio of 10.63. Based on 8.7% EPS growth estimate my fair-value range for DD is $55 - $67. Therefore, I rate it as a buy with strong upside potential. Ticonderoga also has a buy rating with a target price of $62. DuPont's O-Metrix score of 5.38 is also well-above average.

McDonald's (MCD)

McDonald's is one of the most popular stocks among the market. Everybody loves the company, and shareholders are pretty happy with the stock's performance. While the U.S. market is pretty saturated, McDonald's is expanding at a fast rate in global markets. The franchise-based business model has worked very well so far. McDonald's was able to boost its earnings per share at an annual rate of 17.75% in the last 5 years. The stock has been an outperformer in 2011, returning more than 30% in this year so far.

However, McDonald's EPS growth in 2011 was 11.41%. While I like the company, I think the stock is slightly on the pricey side. Based on 10.2% EPS growth estimate my fair-value range for MCD is $79 - $92. Therefore, I rate it as a hold since the stock is trading above my fair-value range. Its O-Metrix score of 3.54 is also below market average.

Abbott Laboratories (ABT)

Abbott Laboratories is one of the largest drug manufacturers in the world. The company employs more than 90,000 workers worldwide. Abbott recently announced that it will split into two companies: One of the new companies will specialize in diversified medical products; the other will specialize in research-based pharmaceuticals. Spin-offs are usually aimed at unlocking better shareholder value, and I think both companies will be highly profitable.

However, similar to McDonald's, Abbott has been an outperformer, returning more than 20% in this year. Based on 9.10% EPS growth estimate my fair-value range for ABT is $56 - $72. Therefore, I rate it as a hold, since the stock is trading near my fair-value range. Its O-Metrix score of 4.17 is in line with the market average.

AT & T (T)

After the T-Mobile merger disaster, AT&T recently won the regulatory approval to acquire Qualcomm's (QCOM) airwave spectrum for nearly $2 billion. The company management claims that it will provide a competitive edge the rival company, Verizon (VZ):

This spectrum will help AT&T continue to deliver a world-class mobile broadband experience to our customers.

I highly doubt about the benefit of this transaction to AT&T. It will be an additional charge of $2 billion on the already un-balanced income statement. AT&T also announced a deal-break up cost of near $4 billion due to the T-Mobile bid withdrawal. These losses will push the company's P/E ratio to higher levels, making the stock look pretty expensive compared to its peers.

Based on 3.40% EPS growth estimate, my fair-value range for AT&T is $25 - $45. The dividend is okay, but the stock is also trading near 52-week highs. Therefore, I rate it as a hold since the stock is priced within my fair-value range. Its O-Metrix score of 3.51 is also below market average.

Source: 6 Dividend Stocks To Buy Or Hold For Strong Income In 2012