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Yield famine investors have flocked to dividend paying equities, including large capitalization U.S. equities, MLPs, and mortgage REITs, to find cash income in a low interest rate environment. Investors should focus on dividend payer that have staying power and can maintain dividends for years to come.

Screen Criteria for Buys

Dividend Yield greater than the 10 year Treasury

Price to Earnings less than 20x

EBITDA Margins greater than 30%

Dividend Payout Ratio of less than 60%

CME Group Inc. (NASDAQ:CME) – exchange

Dividend Yield: 2.5%

EBITDA Margins: 71%

Price to Earnings: 12.4x

Market Capitalization: $15.5 billion

Dividend Payout Ratio: 28%

Thesis: CME should benefit from greater regulations and the Company will benefit from growth in OTC derivatives market.

Johnson & Johnson (NYSE:JNJ) – healthcare / consumer products

Dividend Yield: 3.5%

EBITDA Margins: 30%

Price to Earnings: 15.8x

Market Capitalization: $177.0 billion

Dividend Payout Ratio: 53%

Thesis: JNJ commands the #1 and #2 market positions in the majority of its product categories. JNJ benefits from market tailwinds in the healthcare market with aging baby boomers.

BlackRock, Inc. (NYSE:BLK) – financial

Dividend Yield: 3.1%

EBITDA Margins: 40%

Price to Earnings: 14.1x

Market Capitalization: $32.0 billion

Dividend Payout Ratio: 40%

Thesis: BLK is the largest asset manager in the world with over $3.0 trillion under management. The company has a strong presence in the institutional market.

McDonald's Corporation (NYSE:MCD) – consumer/ food

Dividend Yield: 2.8%

EBITDA Margins: 38%

Price to Earnings: 19.6x

Market Capitalization: $101.9 billion

Dividend Payout Ratio: 47%

Thesis: MCD commands a market leadership position in nearly all the markets in which it competes. The Company is a strong performer in weak economic environments.

Dividends Per Share

Company

2008

2009

2010

LTM Period

CME Group

$4.60

$4.60

$4.60

$5.35

Johnson&Johnson

$1.80

$1.93

$2.11

$ 2.22

BlackRock, Inc.

$3.12

$3.12

$4.00

$ 5.13

McDonald's

$1.63

$2.05

$2.26

$2.44

Payout Ratio

Company

2008

2009

2010

LTM Period

CME Group

86.0%

37.0%

32.1%

28.3%

Johnson&Johnson

38.8%

43.4%

43.5%

53.4%

BlackRock, Inc.

53.4%

48.2%

37.6%

39.5%

McDonald's

42.3%

49.1%

48.7%

47.3%

Company Filings.

Equities to Avoid in the Current Environment

I am avoiding mortgage agency REITs, including American Capital Agency (NASDAQ:AGNC) and Annaly Capital Management (NYSE:NLY). Mortgage REITs are highly levered investment vehicles that distribute 90% of their earnings to shareholders. Agency mortgage REITs invest in agency (e.g. Freddie, Fannie) mortgage based securities with virtually no credit risk. The risks in agency mortgage REITs come from rising interest rates and prepayment in mortgages. Given the administration and Federal Reserve’s focus on fixing the housing crisis, investors should focus on rising prepayments. Recent data is indicating that prepayment rates have been rising in the most recent quarter. In addition Annaly Capital cut its dividends and veteran mortgage bond investor Jeffery Gundlach recently cut his holdings of mortgage REITs citing sensitivity toward prepayment rates. I am avoiding agency mortgage REITs until we get some clarity on prepayments or if the stock prices fall to 0.80x – 0.85x book value

American Capital Agency (AGNC) – Mortgage REIT

Market Capitalization: $6.2 billion

Dividend Yield: 19.9%

Price to Book Value: 1.05x

Leverage 7.9x

Annaly Capital Management (NLY) – Mortgage REIT

Market Capitalization: $15.6 billion

Dividend Yield: 14.2%

Price to Book Value: 098x

Leverage 5.5

Disclosure: I am long JNJ.

Source: 4 Dividend Stock Buys And 2 Sells