6 Dividend Stocks To Add To Your Portfolio In Q1

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 |  Includes: AAPL, CTL, GOOG, MRK, MSFT, PFE, SIRI, T, VZ, WMT
by: Richard Saintvilus

To continue on with the series of discussions that we’ve started as it relates to taking the necessary steps toward our portfolio’s recovery in 2012, we’re going to investigate a few names that you likely have already heard of, but they might have fallen out of favor or just merely have left the limelight for a variety of reasons. As has been the case previously, we are going to establish a baseline of where equities left off in 2011 to get a performance gauge of where they may be heading in 2012. We are going to look again at the graphic below to gain some perspective. It is my reminder that what I thought I knew for all of last year were actually myths.

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S&P500 Sector Performance.PNGClick to enlarge

By looking at the sector performance chart and seeing how well utilities and consumer staples performed, the only question that continues to resonate with me is, how could I have missed it? But looking back now and seeing the impact that the economy has had on consumer confidence, it all makes sense. How could it not? My goal for 2012 is to avoid these similar mistakes and accept responsibility for my own investment decisions – many of which (admittedly) were not only misguided, but they were founded on certain market myths.

Having New Perspective

The first obvious myth to which I had fallen prey was the idea that dividend paying stocks were somehow no longer growth stocks. In fact, I said as much and made (what I thought was) a decent case for why I felt Apple (NASDAQ:AAPL) should not offer a dividend. This is despite its seemingly endless cash reserve. To me, the idea of any company paying a dividend was an indirect admission that it could no longer come up with better ways to use its capital – or in Apple’s case, it would be admitting that it has “run out of neat ideas” after having seemingly produced one golden egg right after the other. But Sirius XM (NASDAQ:SIRI), another one of my holdings, has recently mentioned not only possibly paying a dividend sometime in 2012, but also buying back a good portion of its outstanding shares.

So is it fair for me to punish a company for wanting to share its cash with shareholders? As an aggressive investor, I was not able to make up my mind on this question. However, after that article’s publication, I have taken on a different perspective on this – particularly when considering the poor performances of the market’s once dominant sectors.

“New perspective” has to be the mantra of 2012 if one is to learn from the fallacies of last year. This is also significant for value investors who are looking to capitalize on the many areas that were abandoned in 2011. I have to think that there will be rewards with this approach. Several names that have met the criteria of new perspective included the following dividend paying giants.

Company

Dividend Yield

Market Cap (Billions)

Microsoft (NASDAQ:MSFT)

3.10%

$218.3B

Verizon (NYSE:VZ)

5.66%

$108.8B

AT&T, Inc. (NYSE:T)

6.24%

$163.3B

Merck (NYSE:MRK)

5.06%

$101.2B

Wal-Mart (NYSE:WMT)

2.40%

$204.6B

Pfizer (NYSE:PFE)

4.34%

$141.8B

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Microsoft

Microsoft continues to intrigue me right here. Not only does it pay a decent dividend, but I continue to feel that the stock is exceptionally cheap at current levels. In 2011, I was too concerned with growth – a strategy that did not bode particularly well in depressed bear markets. Although I already own a decent portion of the company, I failed to capitalize on what I felt were opportunities to add on several of its dips. For quite some time now, the stock has traded at a significant discount to a conservative cash flow model.

The mistake that I’ve made over the past couple of years is ignoring this important fact. Growth has always been my primary investment motivation and something that Microsoft has failed to produce over the past several years. But regardless of how one feels about the company and its prospect of competing with Apple and Google (NASDAQ:GOOG), the fact remains that Microsoft still has a business with very good returns on capital and excellent cash flow.

Microsoft will most likely never grow again in a way that resembles the mid to late 90s but that does not mean it does not have life. It has been considered the sleeping giant and remains only one good idea away from being awakened, and when it does, $32 will be a realistic destination. But at least there is a decent dividend to pay investors to wait.

Verizon and AT&T

Perhaps the best reason to own either Verizon or AT&T (T) is for their strong dividend yields which currently are 5.6% and 6.4%, respectively. These two have been considered safe havens of sorts because the dividends get bigger as the stock falls. Among the telecoms, only CenturyLink (NYSE:CTL) offers a better dividend at an 8.6% yield. However, where both companies might fall short on the yield, they more than make up for it in growth prospects - Verizon in particular.

The company not only features one of the better 3G and 4G networks, but also has a wide selection of wireless products highlighted by Apple’s iPhone and devices on Google’s Android platform. The company is in great position to add to its customer base. In fact, subscriber growth increased faster last quarter (1.3 million new wireless customers) than the previous two and a half years, thanks primarily to the iPhone. Consolidated revenues grew a solid 6.3% year-over-year to $27.5 billion during the quarter.

As the competition sorts itself out, Verizon's management is doing an excellent job of focusing on adding shareholder value. The iPhone deal has proven to be the game-changer that it needed to propel the stock going forward. That hefty dividend also makes it an appealing stock to hold regardless of what might be ailing the market.

Merck and Pfizer

Merck and Pfizer are interesting considerations here because aside from the fact that they pay a respectable dividend, both stocks are sitting at 52-week highs. To me this has always been a sign to wait for the pullback. But with this being a new year and all, well I’ve gotten a new perspective and as I’ve said previously, I’m putting behind some old myths.

Having said that, it remains hard to assess where either company is and where they might be going. Despite the positives in the stock, there are some concerns of both companies that are legitimate. Some of which has had to do with limited R&D pipelines. But despite all of that, I continue to believe that over the long-term there will be some value in both stocks.

As big-cap drugs have been laggards for several years, investors have plenty of choice in the space. Much of what can be said about Merck can also apply to Pfizer and vice versa. However, Merck in particular offers a solid dividend payout and a relatively stable, even if not exciting, business outlook. While drug companies for the most part have spent many years trying to regain investor trust, it may be time to reevaluate them and appreciate them for the cash flow they do still offer.

Wal-Mart

Another name that continues to get overlooked is the ever dependable king of retail. It has that same Microsoft syndrome of being slow moving and slow growth over the past 10 years. Outside of a few excursions, the stock has stayed relatively steady between $45 and $55 for most of the past decade. During that same period, though, the shares have returned nearly $7 in dividends, so long-term investors are not exactly empty-handed.

Wal-Mart is not likely to ever excite anyone with its growth again, but the company is caulking up some of its gaps. The company is working to repair relationships with suppliers and pay a bit more attention to what customers would like to see in the stores. At the same time, it is expanding relatively aggressively overseas. With a shockingly consistent record of mid-teen returns on total capital, a large foreign opportunity and a nearly 3% yield, Wal-Mart can be a core holding in conservative portfolios.

Summary

Managing risk and avoiding losses are the surest way to stay in the green even in the toughest bear markets. Sometimes, watching paper losses are still too tough to bear for even the most seasoned investors. One of the ways to avoid some sleepless nights is to understand that dividends do in fact matter. A dividend check can often be the difference between an investor holding through some tough economic times or opting to cut their losses and moving on. In 2012, I will be looking for such companies. Though growth will always come at a premium, dividend issuing companies make waiting for growth a tad easier.

Disclosure: I am long SIRI, AAPL, MSFT.