The Best Dividend Stocks of 2011

At the end of last year, I chose three dividend stocks I thought would be solid performers for 2011. A little more than halfway through a bumpy 2011, we find that these three picks on the whole are beating the S&P and offering up bigger dividends while you wait.

The three dividend stocks are Frontier Communications (NYSE: FTR  ) , Altria (NYSE: MO  ) , and Annaly Capital (NYSE: NLY  ) . Each pays a huge yield, ranging from Altria's 6% to Annaly's 14.5%. I selected these fat dividend stocks because of their ability to lead to solid total returns over a long period of time, as I explain here.

While these stocks haven't been without their own stumbles in the recent market meltdown, Altria and Annaly have held up well. Frontier has been taken to the woodshed. Still, an equal weighting of these stocks would still be outperforming the S&P.

Company

Yield

Dividend-Adjusted Performance (YTD)

Frontier

10.8%

(25.2%)

Altria

6.0%

5.4%

Annaly

14.5%

7.1%

SPDR S&P 500

1.9%

(5.2%)

Source: Yahoo! Finance. YTD = year to date.

If averaged across the three picks, this portfolio is down about 4.2%, still outperforming the S&P so far this year by a full percentage point. The portfolio also offers a higher yield. I still think this grouping is a solid place for money, and I added my own cash to Annaly and Frontier in what I call the world's best dividend portfolio.

Part of the thesis for selecting Frontier was that its meaty dividend would allow it to close the pricing gap with lower-yielding peers Windstream and CenturyLink (NYSE: CTL  ) , whose yields sit at 8.4%. In fact, the reverse happened, with Frontier shares off 25% since the start of the year, more than either CenturyLink (-22.5%) or Windstream (-11.5%). With the drop, Frontier and its huge yield look as attractive as ever.

While the stock sold off following Frontier's recent earnings report, which fell a penny short of the Street's expectations, the CEO noted that cost savings of integrating its recent acquisition of Verizon lines were running ahead of schedule. In fact, she bumped up her estimates of annual savings to $600 million. And the free cash flow payout ratio was 77% for the quarter, a little above last quarter's 74%. That's still reasonable for this type of company.

Altria had its usual quarter, fighting out a market-share battle with other domestic tobacco players and remaining quite profitable in the process. While investors appeared less than thrilled with the 6% increase in earnings per share, the story here is about compounding dividends over time, and this king of American tobacco has more than a few puffs left. Altria's higher current dividend is the trade-off you take for slower growth. If you're more inclined to heady dividend growth in exchange for a lower (but still sizable) yield, then you might like Altria's spinoff, Philip Morris International (NYSE: PM  ) , which shoots off a 3.8% yield and has substantial growth opportunities in emerging markets around the world.

As for Annaly, the conditions for it to flourish -- low interest rates -- continue unabated. In its most recent quarter, the company reported an interest spread of 2.45%, up 28 basis points from last year's quarter. That's a feat that peers Armour Residential REIT (NYSE: ARR  ) and Chimera Investment (NYSE: CIM  ) weren't able to accomplish in the quarter, as their spreads were down 4 basis points and 51 basis points, respectively. But conditions look great for all these players in the mortgage REIT space, as the Federal Reserve has promised near-zero rates until mid-2013. That should allow them to keep pushing out their massive dividend yields. So it looks like Annaly might be on 2012's list of best dividend stocks, too.

Foolish bottom line
So that's where things stand with these dividend dynamos about halfway through the year. Looking for other great dividends? I invite you to take a look at 13 other dividend stocks in a free report from The Motley Fool called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this special free report, and now you can access it today at no cost. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

Jim Royal, Ph.D., owns shares in Frontier and Annaly. The Motley Fool owns shares of Philip Morris International, Chimera, Altria, and Annaly. Motley Fool newsletter services have recommended buying shares of Philip Morris International . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 15, 2011, at 12:53 PM, chrissybaker wrote:

    Thank you for mentioning Armour Residential REIT Jim, somehow it escaped my attention. Definately worth looking into.

    Here's a handy site with lots of high yielding stocks: http://goo.gl/3y8uz

    I only just now noticed it's in their top 250 list...

  • Report this Comment On August 15, 2011, at 2:32 PM, bennett1209 wrote:

    frontier really?? it last two dividends were $.19 each when they brought in only .08 in earnings over the last 2 quarters? do u really think there going to keep playing out, ill agree with nly but come on with frontier, that dividend wont last

  • Report this Comment On August 15, 2011, at 2:49 PM, pondee619 wrote:

    What were the interest spreads of Armour Residential REIT & Chimera Investment down to. Telling us how much these spreads went down, without telling us to what, is only half the story. You tell us that Annaly"s interest spread is 2.45%, up 28 basis points. Why not the whole story on the other two? Ignorance or Apathy?

  • Report this Comment On August 15, 2011, at 3:39 PM, griderX wrote:

    What's your take on INTC diviy of around 4.08% at current levels. INTC can pay the $0.84 annual dividend with it's current free cash flow of around $3.48/share. It's payout ratio is only about 31%..lots of room for growth.

  • Report this Comment On August 16, 2011, at 12:40 PM, mm5525 wrote:

    PM will also be raising their dividend by around 6 cents on the dec date of September 14 for the October payout. They raised last fall by 6 cents, and their EPS has been much higher in 2011 than it was in 2010. It could very well be higher than 6 cents this time given they have a 60+% payout ratio from the EPS, and they raised guidance to $4.70 to $4.80 a year in the last earnings release.

  • Report this Comment On August 16, 2011, at 8:00 PM, 1caflash wrote:

    FTR, CTL, CIM and T are in my DRIP. My most interesting investment is STTN (Smart-Tek Solutions). It is selling at about eleven-cents-a-share. Read the SEC filings. You might like STTN. When is the last time one of Your stocks rose over 50% in the last two trading sessions?

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