My Top Dividend Stock for 2012

Today, I'm going to pick out one dividend stock that I will believe will far outperform the S&P 500 -- with dividends reinvested -- between now and Dec. 31, 2012.

For this to happen, I will be picking from a pool of stocks that share three characteristics: They will fulfill basic human needs, which makes them recession-resistant; they will offer a yield of at least 3%; and they will have the possibility for strong price appreciation -- which is especially important since I'm investing with a one-year horizon.

Meet the contenders
In order to safeguard against the havoc a global recession could create on the economy, I went to the relatively stable industries of utilities and waste collection. Though demand may slow, I believe that even in a recession, people will still be turning on their lights at night, and they'll still want their garbage to be picked up in the morning.

From these two industries, I went looking for exciting candidates who were offering up yields of at least 3%. After vetting the candidates, I settled on these six possibilities. Below, I included information on their dividend payout, its safety, and their chance for price appreciation.

Company

Dividend Yield

Payout Ratio

Forward P/E

Price/Sales

Price/Book

Waste Management (NYSE: WM  )  4.3% 65%  13.4 1.1 2.4
Republic Services (NYSE: RSG  )  3.2% 57% 13.1 1.2 1.3
Veolia Environnement (NYSE: VE  )  11.5% 76% 10.3 0.1 0.6
Atlantic Power (NYSE: AT  )  8.4% N/A  N/A  7.3 2.4
Otter Tail (Nasdaq: OTTR  )  5.5% 135% 20.6 0.6  1.2
AmeriGas Partners (NYSE: APU  )  6.7% 126% 15.5 1.0 7.5

Source: Yahoo! Finance. N/A = not available; the company is both earnings and free-cash-flow negative.

Though the safety of a dividend payment (as measured by the payout ratio) wasn't one of my three characteristics, I simply can't ignore the fact that Atlantic Power, Otter Tail, and AmeriGas all pay out more than they take in via earnings or free cash flow.

That left me with my waste disposers, and there's no question that Veolia sticks out as an enticing candidate. It would have been very (small "f") foolish to choose Veolia just based on the chart above, but a deeper look at the business convinced me that this stock is primed for outperformance. Read below to see why.

A diversity of offerings
Based out of France, Veolia has its hand in many different businesses. Here's a breakdown of where revenues came from in 2010.

  • Water and sewage: This division -- which accounted for 33.7% of revenue in 2010 -- could be a major growth factor in the future. The company's services could help the growing global middle class get access to the clean water they'll come to expect on a daily basis.
  • Energy services: Encompassing heating and cooling networks, this accounted for 6.9% of revenue in 2010.
  • Environmental services: By far the largest segment of the company -- coming in at 52.4% of revenue -- this is, at its bare bones, the trash removal service that many people are familiar with.
  • Transportation: Though it is low-margin and low-revenue right now -- accounting for 7% of 2010 revenue -- some believe that transportation could be a boon in the future, when more municipalities wish to run their vehicles on Veolia's network.

So, what's the problem?
With so much diversity and potential upside -- in transportation and water/sewage -- some might be surprised to see that the company is trading for just 0.1 times sales. The answer for this downturn is threefold.

First, there was a collection of bad news that hurt the company over the past few years. Disappointing earnings, followed by the departure of a longtime CEO, and the discovery of an accounting error, which sparked fears of malfeasance, all took a toll.

Furthermore, Veolia's contracts are largely with municipalities, many of them in Europe. Unless you've been hiding under a rock, you know that anyone counting on payments from European municipalities could be playing with fire.

Finally, the company's dividend yield is likely to take a hit in the coming year. In Europe, companies tend to be far more flexible with their dividends than they are stateside. Veolia adjusts its dividend yearly to make sure it's sustainable. In 2009, just 42% of free cash flow was used to pay its dividend. In 2010, the figure was upped to 86%. Even our dividend guru James Early, who recently recommended the stock, concedes that "we'll see a dividend cut."

I see huge upside
With regard to all three forces pushing the stock down: I see far more upside than downside at today's prices. For starters, the accounting error that caused panic was small, and I don't think it's indicative of a systemic problem. Furthermore, I believe that even in the worst-case European scenario, trash collection and disposal contracts would be one of the last services to be cut.

I also think that the company has several avenues for growth, especially in their sewage treatment and desalinization services -- which could be in high demand in the developing regions of Asia.

And even though the dividend will likely be cut, I think it will still be substantial (over 3%), and I'm willing to reinvest those dividends with so much upside potential for price appreciation.

My plan
Between now and the end of the year, I'll be putting my own money into Veolia, via my Roth IRA. I'll also be making a CAPScall on my profile for Veolia. Hopefully, after doing your own due diligence, you'll consider doing the same.

If, however, you'd like some more traditional dividend ideas, I'd like to offer you access to our special free report: "Secure Your Future With 11 Rock-Solid Dividends." The report will give you the names of 11 companies our analysts believe will help guide your portfolio toward a comfortable retirement. It's yours today, absolutely free!

Fool contributor Brian Stoffel does not own shares of any companies mentioned. He will be buying shares of Veolia between now and the end of the year. You can follow him on Twitter at @TMFStoffel.

The Motley Fool owns shares of Waste Management. Motley Fool newsletter services have recommended buying shares of Veolia Environnement, Waste Management, Otter Tail, and Republic Services, and creating a write covered strangle position in Waste Management. 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 (8) | Recommend This Article (41)

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 December 07, 2011, at 1:57 PM, Hawmps wrote:

    I like the pick... VE does look cheap, and I don't think you can argue with the need for the services they offer along with future growth potential. I really like the fact that they are not just a trash company or not just a water/sewer company. They have their fingers in a few interrelated fields which (given enough future growth) offers the potential for a split into multiple companies down the road that can focus on their specializations. This sort of thing has happened with other companies before to the beneft of shareholders owning several growing companies.

    But, I think reinvesting an annual dividend payout has little influence on a 12 month holding period, especially since it will probably be cut. That said, I really like the pick and it's going on my watchlist for a possible buy-n-hold for a much longer holding period than 12 months.

  • Report this Comment On December 07, 2011, at 2:05 PM, TMFCheesehead wrote:

    @Hawmps-

    Thanks for the thoughts. I agree, the impact from dividend reinvestment will be small over just one year, but should I continue to hold beyond a year, it'll be an added bonus.

    Brian Stoffel

  • Report this Comment On December 07, 2011, at 2:16 PM, Hawmps wrote:

    Regardless of the Div., VE looks cheap by these #s.

  • Report this Comment On December 07, 2011, at 2:55 PM, deltafox2 wrote:

    Debt/Equity of VE is another problem. It's way beyond the acceptable. A risky play these days. There is a plan to sell off the transportation business to make some cash. IF this succeeds there may indeed be some upside.

  • Report this Comment On December 07, 2011, at 5:26 PM, topbeancounter wrote:

    Interesting, but I think I'll hang onto my reit for a few more years while it's paying me almost 12%. As long as Citi and B of A are out there writing bad loans (they just can't help themselves), I think there will plenty of business to go around. Just cashed my last very large and very nice quarterly dividend check.

  • Report this Comment On December 07, 2011, at 10:08 PM, cdb5556 wrote:

    wow, for a "conservative" play, this seems a risky.

    1) a French company, earning Euros..with the current shakiness of the EU, not sure I want my money there, earning euros that may be no more.

    2. BIG drop in share price this year, down almost 20 bucks from it's high. Yes, it's nice to get a bargain, but cheap stocks can still fall to become cheaper stocks

    3. much better utility options-personally, I bought BIP, a diversified international player at 23 back in May. pays a well funded 5.3% and has a low pe to boot. price performance is better, too.

  • Report this Comment On December 09, 2011, at 5:35 AM, TMFSpiffyPop wrote:

    Love the CAPScalling, Brian -- love the accountability, and also of course your past performance. Keep up the great work. --David

  • Report this Comment On December 09, 2011, at 5:10 PM, 1caflash wrote:

    I bought 500 shares of Waste Management on Friday December 9, 2011 after I heard on CNBC that the dividend will be increased by 4.4% for the next payment scheduled March 2012. It is part of my DRIP. I have enough cash and time to increase my position if the price-per-share becomes more attractive, as I have learned from watching Jim Cramer to leave some "Wiggle Room" when you like a company. WM is also my residential refuse provider. It is fun to invest in a firm that helps you pay your bills from it. Good luck with the French outfit.

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