2012 Dividend Stocks: 2 To Buy, 3 To Avoid Now

Includes: GE, MO, PG, VZ
by: ValueMax

After decades of being only loved by conservative investors, dividend stocks have become a new fad, as investors have come to appreciate the added benefits of a strong yield stock. Ideally, dividend stocks are not trade happy affairs. You get the most benefit from them by holding them for years. So, which stocks now have good dividends, are good candidates to add to your portfolio and forget them, confident that their solid business models and high dividends will grow a powerful nest egg in years to come? I analyzed five dividend stocks to see which ones you should buy and hold forever.

Altria Group (NYSE:MO) has a recent share price around $29 with a 52-week trading range of $23.20-$30.40 and a market capitalization of $60 billion. It is the holding company that boasts tobacco maker Phillip-Morris as its crown jewel. The company's earnings per share is $1.64 for a price to earnings ratio of 17.82, and an uncomfortably high price to earnings growth ratio of 2.012. It pays an annualized dividend of $1.64 for a juicy current yield of 5.61%. In fact, Phillip-Morris/Altria has been the decades-long poster child for dividend investors. Recent years have been more difficult as the anti-smoking tilt has squeezed earnings. The payout ratio is 96.7, higher than you like to see in a typical company, while dividends have decreased 13.8% over the last five years.

The company is still wildly profitable, with an operating margin of 25.20% and net profit margin at 14.26%, while return on equity was 76.13%. This is a solid company that will be pumping out good dividends for awhile. The trouble is, the company is on a general downward turn, and is now straining to continue its current dividend. The board will be under pressure in 2012 to make another cut in the dividend, and the rule of thumb is buy dividend stocks when dividends are rising, not lowering. Despite the attractive yield, I would pass on Altria.

The Proctor and Gamble Company (NYSE:PG) has a recent price near $64 within a narrow 52-week trading range of $57.56-$67.72 and has a $176 billion market capitalization. Earnings per share for the trailing twelve months comes in at $3.40, for a price to earnings ratio of 18.89, but a more modest price to earnings growth ratio than Altria of 1.385. Its annualized dividend is $2.10 for a solid yield of 3.27%. The opposite story of Altria. In the Spring of 2011, the consumer products giant raised its dividend for the 55th consecutive time. The payout ratio is a conservative 57.5, so it can well afford the current dividend and more. The company is improving earnings and market share despite the problematic economic situation, and looks well-poised for new growth at the next market upswing (whenever that comes). That makes Proctor and Gamble an ideal buy and hold dividend stock.

Our next look is at fast food behemoth McDonald's (NYSE:MCD), which has a recent share price near $100, which is at the top of its 52-week trading range of $72.89-$102.22, while it has a market capitalization of just over $101 billion. The company's earnings per share are at $5.28, and a price to earnings ratio of 18.87 for another uncomfortably high price to earnings growth ratio of 1.995. The annualized dividend it offers is $2.80 for a 2.81% current yield, the lowest of this screen. However, the dividend has steadily increased by 20.4% the last five years, and the payout ratio is a low 47%. McDonald's is the king in an incredibly competitive industry. For decades, McDonald's has taken on new challengers, adjusted, beaten them, and found a way to keep on growing. It could be a good choice for a buy and hold stock, but there are better yields out there.

Telecom Verizon Communications, Inc (NYSE:VZ) has a recent price around $38, a 52-week trading range of $32.28-$40.48 and a $107 billion market capitalization. Its earnings per share is only $0.86 for the trailing twelve months, which calculates out to an oxygen deprived 44.34 price to earnings ratio and an equally steep price to earnings growth ratio of 3.354. Despite the costly share price, the dividend is now $2.00 on an annualized basis, for a bold 5.25% yield. That is because earnings have taken a hit - down 5.86% for the trailing twelve months. The payout ratio is at a completely unsustainable 232.6%. Even before the recent hit, the dividend was mostly flat, with a growth rate of just over 4% for the previous five years. This is another hefty yield that I advise wise investors to steer clear of.

Finally, dividend stalwart General Electric Company (NYSE:GE), which has a recent price near $19 within its 52-week trading range of $14.02-$21.65, and has the largest market capitalization of this screen at $201 billion. The earnings per share stand at $1.24 for the trailing twelve months, which calculates to a price to earnings ratio of 15.38, but a bargain-basement price to earnings growth ratio of 0.873. The $0.67 annualized dividend fetches an attractive 3.57% dividend. Its story is a bit like Verizon, where it had grown its dividend relentlessly, but then hit a bad spell during the Great Recession and sales fell slightly, but the dividend fell by almost 10%. However sales are back up, the company holds more than $10 cash per share and the payout is a comfortable 49.5%.

In the end, General Electric is probably the best buy right now, since its price has still not completely recovered from the beating it took over the past few years. However, both GE and Proctor and Gamble are good buys right now, due to good dividend histories, solid financial fundamentals and positive future expectations. You can buy and hold these dividend stocks with confidence.

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