Dividend Ideas: 2 Buys, 3 Sells

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 |  Includes: ABT, CIM, INTC, MCD, WM
by: Efsinvestment

Due to the expansionary monetary policy in the aftermath of the financial crises, we are very likely to observe a higher-than-expected inflation in the next few years. Some investors prefer precious metals such as gold to protect their savings against inflation. However, I believe dividends provide the best hedge against rising prices. A diversified portfolio of high dividend stocks can support superior returns for the long-term investors. Given the volatility of the markets and paltry bond yields, dividend investing is probably the best method to beat the market with significantly higher alpha.

Nevertheless, one needs to be careful when choosing the right dividend stock at the right price. The paltry yields of government bonds and low interest rates have driven many high-dividend stocks above their fair values. To choose the right stock at the right price, I use O-Metrix Scores, and FED+ Valuations to rank dividend scores. Interestingly, both models tend to give remarkably similar results, when it comes to ranking stocks.

Here is a brief analysis of five dividend stocks paying substantial yields. Based on my analysis, I rate two of them as buy, and three of them as hold. I have analyzed these stocks from a fundamental perspective, adding my FED+ valuations and O-Metrix scores where applicable:

Stock

Yield

O-Metrix Score

Fair-Value Range

My Take

Chimera Investment (NYSE:CIM)

14.4%

13

$5 - $8

Buy

Intel (NASDAQ:INTC)

3.06%

5.96

$36 - $45

Buy

Waste Management (NYSE:WM)

4.1%

3.07

$28 - $41

Hold

Abbott Laboratories (NYSE:ABT)

3.46%

4.03

$58 - $74

Hold

McDonald's (NYSE:MCD)

2.88%

3.81

$84 - $98

Hold

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Chimera - Buy

Chimera is one of the most popular hybrid mREITs in the market. The company operates as an investment fund that invests in both agency and non-agency issued mortgage-backed securities. As a hybrid mREIT, Chimera might sound like a risky investment. 74.5% of Chimera's portfolio consists of non-agency residential mortgage-backed loans. However, since these loans offer relatively higher interests, the company does not need a high leverage.

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Founded in 2007, Chimera is managed by Fixed Income Discount Advisory, which is a wholly-owned subsidiary of Annaly Capital Management (NYSE:NLY). Since it is a relatively new establishment, Chimera does not have much dividend history. However, its management team has a top-notch record for being one of the best players in the mREIT field. With a relatively low leverage of 1.85, Chimera has a more defensive stand against the "Spread Squeeze Risk".

Analysts estimate 2% EPS growth for the company. Based on this growth estimate, my fair-value range is $5 - $8. Note that this is a theoretical price, based on future discounted earnings. mREITs rarely trade above their book value. Nevertheless, at the current P/B ratio of 0.9, the stock is trading at 10% discount to the book value. Thanks to the double-digit yield, its O-Metrix score of 13 is significantly higher than the market average. Insiders are pretty bullish about their company, initiating several buys over the past months.

Intel - Buy

Intel is among my favorite plays in the technology sector. The company was able to boost its earnings at an annualized rate of 22% in the past 5 years. At a trailing P/E ratio of 11.44, it is trading well-below its intrinsic value. There are rumors that Intel is getting into the highly lucrative cable TV business. While Bernstein is skeptical about these rumors, I think they are well-founded. Intel Capital already made significant investments in the Digital Home and Digital Media sector:

Intel Capital's Digital Home and media team works closely with Intel's Digital Home group to drive its SmartTV initiative. Our goal is to accelerate the adoption of SmartTV by creating a vibrant ecosystem that includes home networking silicon, platform software, connected devices, and services. We are particularly interested in TV platforms operating systems, TV apps, SocialTV, and various video and content services including gaming, advertising, and audience measurement.

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Analysts estimate 10% EPS growth for the company. Based on this growth estimate, my fair-value range is $36 - $45. Its O-Metrix score of 5.96 is higher than the market. While not bullish as the model suggests, Maxim Group has a buy rating with a target price of $33.

Waste Management - Hold

Established in 1998, Houston-headquartered Waste Management is involved in the business of waste collection, recycling, and disposal services. It also generates energy from landfill-based resources. With a market cap of more than $16 billion, Waste Management is the largest public company in this business.

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The company was able to boost its dividends by 40% in the last 5 years. It has a consistent history of dividend hikes. Current yield is 4.1%, which is supported by a payout ratio of 66%. Analysts estimate 5.4% EPS growth for the company. Based on this growth estimate, my fair-value range is $28 - $41. Its O-Metrix score of 3.07 is lower than the market average. I think the company has a great moat, but this is more or less priced by the market. Analysts also agree with me. Their mean target price of $34.29 fits perfectly within the middle of my fair value range.

Abbott Laboratories - Hold

Abbott Laboratories is among my top dividend picks for the next 5 years. Illinois-based Abbott is one of the largest pharmaceuticals in the world. In an industry where takeovers and acquisitions are common, Abbott decided to separate itself into two companies. The market welcomed the division plan, as Abbott returned 18.72% in the last 6 months.

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A couple of months ago, I suggested Abbott as a great buy below the fair value. I still think that it is a good choice for future dividend. However, at the current valuation, the stock looks fairly valued. Analysts estimate 8.9% EPS growth for the company. Based on this growth estimate, my fair-value range is $58 - $74. Its O-Metrix score of 4.03 is in line with the market. Analysts mean target price of $60.31 implies that Abbott does not have much potential left in the near-term.

McDonald's - Hold

Similar to Abbott, McDonald's is also among my top dividend picks. The company survived the financial tsunami with no serious damage. It has been a perfect dividend growth stock that provides stable income. A year ago I suggested it as a great buy for the income-oriented investors. At that time, it was trading at a price of $80. Since then, it returned almost 25%, testing the $100 resistance several times. However, it could not pass this resistance, and now the stock is on a retreat.

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I like McDonald's as a company. Its products are simple. The entire business line is based on a menu that has a burger, fries, and Coke. McDonald's did not invent the burger. However, it revolutionized the way people enjoy their burgers. However, after returning 33% in the last year alone, the stock looks quite pricey. Fellow SA Contributor, Craken also agrees with stating that rising commodity and labor costs will lower the profit margins.

Analysts estimate 10% EPS growth for the company. Based on this growth estimate, my fair-value range is $84 - $98. Its O-Metrix score of 3.81 is lower than the market average. Analysts mean target price of $107.77 implies 10% upside potential in near-term, but I am not sure the correction is over yet. I think, a price level near $90 might offer a better entry point. Therefore, I rate McDonald's as a hold for now.

Disclosure: I am long INTC.