6 Great Dividend Plays Heading Into 2013

Includes: AEP, BMY, CPB, DVY, MRK
by: Dave Dierking, CFA

Dividends are one of the truly underappreciated aspects of an investment's total return. Many people still want to focus solely on the movements in a stock's price when assessing performance and determining whether or not a particular security is a good investment. While capital gains still account for the lion's share of an investment's total return the dividend income generated still provides a significant and predictable source of return.

Dividend income is starting to come into vogue again as companies are using their free cash flow to reward shareholders directly. Companies that have higher dividend payouts also tend to be larger and more well-established so adding these stocks to your portfolio provides the added benefit of lowering the overall risk of your portfolio through diversification.

Bonds and cash have traditionally been the best sources of income for a portfolio but as the economy continues to find a firm footing some stocks offer compelling value and the dividend yields that come with those stocks are in many cases comparable to what you'd find in the income market.

If you're looking to boost your income through stocks and equity-based mutual funds, here are six great places to start.

Merck (NYSE:MRK)

As the American population continues to age, the health care sector (and the big drug companies, in particular) will remain revenue-producing juggernauts. So it makes a lot of sense to have one of the best health care plays in your portfolio.

Merck reported a bit of a mixed bag in the 3rd quarter as one of its signature drugs, Singulair, started facing competition from the generics. Revenue was down a bit for the quarter but the fundamentals for Merck still look strong. The company is making increasing headway in the diabetes drug market and still has several other promising drugs in the pipeline.

The company boasts a generous 3.6% dividend which is comparable to the other big name pharmaceuticals. Plus, its forward P/E of 12 makes it a much more inexpensive alternative to the likes of Bristol Meyers Squibb (NYSE:BMY).

Campbell's Soup (NYSE:CPB)

This consumer giant has a wide array of food products and brands and the stock continues to be a great defensive play in the current economic environment.

The company also has several fundamental factors working to its advantage. It's currently working to streamline some of its manufacturing operations which will be a benefit to its bottom line and the company has spent hundreds of millions of dollars buying back its own shares in the open market.

The stock sports a forward P/E of about 13 and its dividend yield sits at a juicy 3.4%. Both numbers put it in the top half of the consumer goods sector.

American Electric Power (NYSE:AEP)

Utility stocks have long been great dividend producers. Their conservative business plan coupled with the constant demand for energy make them a top choice for investors looking for a predictable income stream. American Electric Power is no exception.

AEP has shown a strong history of growing its dividend payout regularly and enjoys the double benefit of providing an above average yield at a below average valuation. Its 1.5 price-to-book ratio is currently below the industry-wide average of 1.7 while its 4.3% dividend yield rates above the 4.0% industry norm.

Additionally, AEP maintains one of the higher profit margins in the industry. All of these factors together make this stock a solid addition to the equity-income portion of your portfolio.

iShares Dow Jones Select Dividend Index Fund (NYSEARCA:DVY)

If you don't want to scour for individual stocks that pay great dividends, why not pay someone to do it for you? Fund investors are regularly turning to ETFs to plug in holes in their portfolios thanks to their high liquidity and rock-bottom costs. iShares is quite possibly the largest provider of ETFs in the world and many of their offerings remain highly rated based on their performance and low-cost structure.

This ETF looks to mimic the Dow Jones Select Dividend Index and is one of the biggest around with assets of over $11 billion. Its current yield of 3.68% compares favorably to other dividend-focused funds and the portfolio risk as measured by the fund's beta is below average for its category. It's broadly diversified with large holdings in utilities, industrials, financials and consumer defensive stocks while returning an average of about 16% per year over the past three years.

Cohen & Steers Realty (MUTF:CSRSX)

Real estate investment trusts are another choice of income seekers due to the regular rent collection on their portfolio of properties. The housing market showed us that these traditionally conservative investments are still susceptible to poor economic conditions but as many local real estate markets start finding their bottoms, REITs should rediscover their value.

The Cohen & Steers fund is widely considered among the best of the REIT funds as it's spent several years on Money Magazine's top mutual funds list. Its current yield of around 2% is below historical averages but its 10 year annualized total return of 12% (and that return includes the housing market collapse) should assuage some fears.

Vanguard High Dividend Yield (MUTF:VHDYX)

If you want to stick to a straight mutual fund, this Vanguard fund should be the choice. It looks for companies that have larger than average and growing dividend yields. Plus, as with any Vanguard fund, you're getting that investment at a bare minimum expense ratio - currently 0.25%

This fund has a current yield of 3.2% and spreads its investments across many sectors to help limit portfolio risk. Its top holdings include ExxonMobil (NYSE:XOM), General Electric (NYSE:GE), Pfizer (NYSE:PFE) and AT&T (NYSE:T) so you know that you're buying some of the biggest, safest dividend-producing companies that are out there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.