Eaton Vance's Top Dividend Stocks: 3 To Buy, 2 Avoid

|
 |  Includes: AEP, PM, T, VOD, VZ
by: Rash Menaria

Eaton Vance Corp. (NYSE:EV) is one of the oldest investment management firms in the United States. It manages ~$ 175 billion in assets and offers wealth management services to both individuals and institutions.

I discussed Eaton Vance's Top Buys and Top Sells in my previous articles. In addition, for investors seeking yield it is also interesting to have a look at Eaton Vance's top dividend holdings. The following is a list of Eaton Vance's top holdings with good dividend yields, as released in its most recent 13F filing with the SEC.

Stock

Symbol

Shares Held as on 12/31/2011

Yield

American Electric Power Co, Inc.

AEP

9831193

4.70%

AT&T Inc.

T

20648136

5.90%

Philip Morris International, Inc.

PM

6936061

4.00%

Verizon Communications Inc.

VZ

11314956

5.30%

Vodafone Group plc

VOD

13473318

5.32%

Click to enlarge

I would recommend going long on American Electric Power, Vodafone & Philip Morris. However, I would avoid AT&T and Verizon.

American Electric Power is one of the largest electric utilities in the United States, delivering electricity to more than 5 million customers in 11 states. It is a predominantly a regulated utility and has a high degree of geographic and regulatory diversification. I like American Electric because of its high yield, and modest EPS and dividend growth prospects. American Electric is also insulated from any exogenous global shocks like the European debt crisis. Despite this, it has a good upside potential given its exposure to wholesale markets. American Electric's earnings can show a good upside if power prices are driven higher by a recovery in gas prices or a tightening in EPA emission regulations. At a forward PE of 12x and with a dividend yield of 4.70%, I believe the stock is attractively valued and one can initiate a long position on the company.

Vodafone is another good buy in the above list. Vodafone is trading at a compelling valuation of just 10x forward PE and EFCF yield of 11%. Its European business is recovering after a period of heavy EBITDA pressure. Emerging markets also provide a significant opportunity for the company. Recently, the Indian Supreme Court cancelled the 2G licenses of several operators. This is likely to lead to sub-scale competitors exiting the market and driving more rational pricing behavior. Vodafone is one of the best dividend stocks, with its dividend comfortably covered and potential for decent topline growth. I see a good chance of stock price appreciation as well as a dividend increase going forward.

Philip Morris also looks good with a 4% dividend yield and a stable business model with decent growth rates.

Among the companies which I would like to avoid, the first one is AT&T. I am not too positive on AT&T. Although its derailed deal with T-Mobile was somewhat expected, the failure of this deal is a net negative for AT&T, as it will now have to look elsewhere for spectrum. Further, fall off of this deal is not good from a competitive point of view for AT&T as it would have been a more powerful competitor with the merger. Without the deal, both Verizon and Sprint (NYSE:S) should be better able to compete.

I also don't like Verizon. Verizon is seeing secular pressure from a declining wireline business and pension dilution. Further, high valuation (15x Forward PE) limits any potential upside for Verizon in the near term.

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