4 High-Yield Dividend Stocks To Buy, 1 To Avoid

Includes: MO, PBI, POM, RAI, T
by: ValueMax

Below, I have analyzed five high-yielding dividend stocks. Four of them are definite buys as they have high valuations and growth prospects. Most of the names analyzed below have stable earnings. However, I recommend that investors be cautious about investing in AT&T (NYSE:T) despite its attractive current prices due to its recent earnings report, which came in below street expectations.

Pitney Bowes (NYSE:PBI) is part of the consumer goods sector. Its stock price dipped 20% in the past twelve months, underperforming the S&P500 (NYSEARCA:SPY) by 22.5%. At its current price of around $19, it offers a forward annual dividend yield of 7.8%, with an estimated forward dividend of $1.48. Last quarter Pitney Bowes' revenue went down by 3.4% while earnings in the same period were up by 94%. Since the company's payout has been 71% at current earnings and cash flows, the company can easily manage to maintain its dividends going forward and maybe even increase its quarterly dividends like it did for the quarter ending in March 2010. Pitney Bowes' is one of the few companies that raised its dividends during the financial crisis and has maintained it to date. At its current price the company is an attractive buy as it is trading at a forward price-to-earnings ratio of 8.98 times, lower than what Siemens (SI) is trading for at 10.05 times its forward earnings.

AT&T Inc. 's stock price has improved by almost 6% in the past 52 weeks, and after the increase in price, the stock offers a dividend yield of 6% with an estimated forward annual dividend of $1.76 per share. The company has already announced its financials for its latest fiscal quarter and despite reporting a loss in the last quarter it maintained its quarterly dividend, hence bringing the full year's dividend payout to 260%. AT&T has reported a massive increase in its costs of goods sold while selling, general and administrative expenses almost doubled turning the company's EBITDA red. On the revenue side, wireless data revenue was up by 19%. Despite the stock currently trading at forward price-to-earnings ratio of 11.4 times, I advise investors to be cautious till the release of the company's annual report or the disclosure of a reason for the sudden rise in expenses. The company's closest competitor Verizon (NYSE:VZ) is currently trading at a forward price-to-earnings ratio of 13.3 times.

Altria group's (NYSE:MO) stock has gone up by almost 20% in the past twelve months, and is now offering a dividend yield of 5.8% with an expected forward annual dividend of $1.64 per share. In its last reported quarter, the company's profits fell by 9%. Altria offers an attractive return on equity of 72%. It has a healthy balance sheet with a current ratio of 1.5 and has steady cash flows. We expect the cigarette company to continue with its steady performance and consistent dividend payout, which was 93% last year. Other companies in the sector, like Lorillard (NYSE:LO) are trading at the slightly higher forward price-to-earnings ratios of 12.6 times. Comparing this with Altria's ratio of 11.9 times makes it an attractive buy.

Reynolds American (NYSE:RAI) is another company that manufactures and distributes cigarettes. The company has relatively stable stock returns with a beta value of 0.63. Its stock price has gone up by 24% in the past twelve months. Like Altria it also offers a high dividend yield of 5.7% with an estimated annual forward dividend of $2.24 per share. The company has a stable business model, which allowed it to increase its quarterly dividends in 2011, with a payout of 91%. In its last reported quarter, the company reported a decline in revenue of 1.7%, which translated into a decline in earnings of 3.7%. However, the company has a healthy balance sheet with a current ratio of 1.09, cash per share value at $3.45 and steady cash flows, making it a likeable stock. At current prices, the stock is trading at a forward price-to-earnings ratio of 13.2 compared with Lorillard , which although is trading at a lower ratio, offers a lower dividend yield of 4.8%.

Pepco Holdings (NYSE:POM) is in the utilities sector and engages in distributing electricity. Its stock price has risen by 6.7% in the past twelve months to almost $20. At current prices, the stock is offering a dividend yield of 5.5% with next year's dividend estimated to be $1.08 per share. The company suffered in 2010, with an earnings per share value of only $0.17. However, it maintained its dividends. In 2011, the company fared much better with earnings per share of over $1 in the first nine months. Its balance sheet remains healthy with a current ratio of approximately one and a total debt-to-equity ratio of 1.1. Despite steady business, not all companies in the sector offer good dividend yields. Constellation Energy (NYSE:CEG) only offers a yield of 2.7%. Pepco is trading at 15.6 times its forward earnings and is recommended for investment.

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