3 Must-Own Stocks for 2012 and 1 to Avoid

Today, I'm about to slam one favorite stock of dividend investors, but I'll come back with three more stocks, including two dividend payers, that look poised for a prosperous new year.

Kimberly-Clark (NYSE: KMB  ) , step right up.

The company behind Kleenex and Huggies has rewarded dividend investors well in the past, compounding its dividend at 7.5% annually over the last five years. But you should beware of one disturbing trend: Kimberly-Clark is now earning about what it did a decade ago -- $1.7 billion compared to $1.6 billion in 2001.

And that's not just cherry-picking; over the past decade, net income has been range-bound, fluctuating from $1.5 billion to $1.9 billion. But how is the company managing to consistently boost its dividend? Two ways: (1) using free cash flow and debt to reduce share count, and (2) increasing its dividend payout ratio, from 37% in 2001 to 65% in the last four quarters.

In the not-too-distant future and without some earnings growth, Kimberly-Clark won't be able to manage those healthy dividend increases so safely. That's not likely to happen in 2012, but commodities prices have been really hurting the company's bottom line.

Kimberly-Clark shows why it's important to reevaluate the fundamental performance of your companies at least annually and find new companies that can treat you right. So out with the old, and in with the new -- three stocks that should be nice to your portfolio in 2012.

McDonald's (NYSE: MCD  )
The Golden Arches has done nothing but deliver for investors over the past year, up a meaty 32%, and it's positioned well to ride the wave of globalization to an ever-increasing share price and dividend.

McDonald's fares well in almost any economic climate, putting up strong same-store sales every quarter in every region. During lean times, consumers turn to Mickey D's for low-priced meals, but even when the economy perks up, the restaurateur still packs 'em in.

You can see that in its share price, which was a rock in the 2008-2009 financial crisis. Recession? What recession? That stability should be a boon for investors if things get rough in 2012.

While peer Yum! Brands (NYSE: YUM  ) generated over 40% of its operating profit from China in the last year, McDonald's is not overly reliant on the Middle Kingdom for its profitability. It also means the company still has huge room for growth there. And in contrast to Kimberly-Clark, McDonald's has grown earnings at a 13% annual clip over the last five years.

That has helped the company increase its dividend by nearly 20% annually over the last half-decade. With a 2.9% yield and a commitment to pay out all of its free cash flow to investors, McDonald's looks like a strong play for 2012. It trades at 19 times earnings -- not exactly cheap, but the best blue chips rarely are.

Southwestern Energy (NYSE: SWN  )
With natural gas prices at multiyear lows, Southwestern might seem like an odd pick. But that's exactly when you want to buy one of the best operators. In times of weak gas prices, the lowest-cost producers are the safe place to invest, since they can weather the downturns best. Eventually, low prices will put inefficient companies out of work, leaving the best standing. Southwestern is one of the most efficient companies out there.

Unlike Kimberly-Clark, Southwestern has a strong record of growing income over the last decade, from just $35 million in 2001 to more than $600 million over the last four quarters. And while low gas prices have taken their toll, Southwestern has hedged a significant chunk of its production at much more favorable rates (above $5 per million cubic feet) through 2013. That means Southwestern should be able to keep those profits pumping in 2012.

Now near its 52-week low, the stock trades at less than seven times operating cash flow and sports a relatively clean balance sheet, with just $1.3 billion in debt against a market cap of $11.4 billion. Southwestern also just announced a huge new oil play in Arkansas and Louisiana called the Brown Dense, and it holds 460,000 net acres. With oil at much more attractive levels than natural gas, the play could create substantial value for shareholders.

Annaly Capital (NYSE: NLY  )
My final must-own for 2012 is Annaly, a mortgage REIT that pays out a hefty dividend like peers Armour Residential (NYSE: ARR  ) and American Capital Agency (Nasdaq: AGNC  ) .

Annaly looks like a great play for 2012 because the Federal Reserve has announced that interest rates will remain low through at least mid-2013 due to high unemployment and sluggish growth. Those low interest rates mean that Annaly's funding costs should remain cheap, allowing it to rack up a rate spread, the difference between what it borrows and what it receives in interest.

Annaly pays out 14.4%, and even though its yield is lower than those of Armour and American Capital, Annaly looks like the best of the mortgage REIT lot. In contrast to Annaly, Armour has a spotty record of growing book value per share, and American Capital has only been around since 2008.

While those rivals opened shop in the last few years, Annaly has a relatively long track record of creating book value dating back to 1997. So it's seen the ups and downs of the market and can navigate them deftly.

Foolish bottom line
Those are three great plays -- including two dividend stocks -- for the coming year. Want more great ideas? If dividends are your game, then we have a brand-new free report from The Motley Fool's expert analysts called "Secure Your Future With 11 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. Get instant access to the names of these 11 high-yielders -- it's free.

Jim Royal, Ph.D., owns shares of McDonald's and Annaly. The Motley Fool owns shares of Yum! Brands and Annaly. Motley Fool newsletter services have recommended buying shares of Kimberly-Clark, Annaly, Yum! Brands, and McDonald's. Motley Fool newsletter services have recommended writing puts in Southwestern Energy. 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 (13) | Recommend This Article (82)

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 21, 2011, at 6:26 PM, brooks1980 wrote:

    I purchased Annaly earlier this year. It's a solid investment. The first time I received a dividend disbursement I blinked twice; I'd never seen anything like it. I didn't know companies paid dividends that big - it was ginormous.

    Furthermore, the stock price has slightly depreciated, but many stocks have dipped as a result of a shaky market. On the other hand, it's encouraging to hear that interest rates will remain low until mid-2013, which means that I can hold NLY and continue to receive ginormous dividends. Thanks for the investment advice Motley Fool. Merry Christmas!

  • Report this Comment On December 21, 2011, at 7:22 PM, craigss1 wrote:

    Jim,

    I don’t expect MF editors and analysts to always be in agreement, but I find it a bit disconcerting when within a 2 day period they provide diametrically opposed advice on the same stock. While you see Annaly Capital as a Must-Own Stock for 2012, MF analyst Austin Smith calls it one of the Scariest stocks of 2012. What’s a poor Fool to believe?

  • Report this Comment On December 21, 2011, at 8:00 PM, 102971 wrote:

    I agree with Jim. It seems to me that whether Annaly goes up 20% or down 20% TMF will claim that they got it right. Please get your heads together.

  • Report this Comment On December 22, 2011, at 1:33 AM, sharpx2 wrote:

    Seems to me that we're talking about chasing this delicious, enormous dividend for about a year . . . and then either hoping that the Fed doesn't raise rates, or alternatively planning to time the sale of this stock to avoid the downdraft that will ensue if rates do go up as many seem to think they will. It seems tough to me to milk this dividend and then think that you're going to be the only one wanting to unload this stock in an environment where interest rates are moving upward. So, really this is a time-the-market bet, and we all know those sometimes go south on you. High reward, but definitely high risk, so make sure it fits your profile before plunging in.

  • Report this Comment On December 22, 2011, at 5:50 AM, skypilot2005 wrote:

    On December 21, 2011, at 7:22 PM, craigss1 wrote:

    "Jim,

    I don’t expect MF editors and analysts to always be in agreement, but I find it a bit disconcerting when within a 2 day period they provide diametrically opposed advice on the same stock. While you see Annaly Capital as a Must-Own Stock for 2012, MF analyst Austin Smith calls it one of the Scariest stocks of 2012. What’s a poor Fool to believe?"

    On December 21, 2011, at 8:00 PM, 102971 wrote:

    "I agree with Jim. It seems to me that whether Annaly goes up 20% or down 20% TMF will claim that they got it right. Please get your heads together"

    Over the years, I've used articles at TMF to discover potential investments. I want "both sides" of a company examined before I "pull the trigger". That is good.

    I suggest you take the time to do your own D. D., next. Beware of the website that only gives you "one side".

    Disclosure: I've been "in & out" of NLY and Yum over the years. I don't currently own them because they don't fit with my view of our macroeconomic future but, I feel they are well run companies.

    Fool On

    Sky Pilot

  • Report this Comment On December 22, 2011, at 8:13 AM, Chontichajim wrote:

    It looks like difference in MF analysis depends on the timeframes you expect to hold the stocks which leads me to disagree with both NLY and KMB suggestions just for 2012, though might agree over a 5 year period.

    I own MCD & KMB, sold NLY in 2011 for TWO and also own AGNC. NLY lost value in 2011 compared to AGNC and TWO while paying a lower dividend. It may be a better managed company long term, but I don't own REITs for long term I just expect them to maintain dividends while real estate conditions remain unchanged.

    I kept KMB over PG in 2011 and will do it again in 2012 since KMB pays a better dividend and is likely to outperform PG for 1 more year. Very long term PG is going to be better than KMB, but probably not in 2012.

  • Report this Comment On December 22, 2011, at 9:57 AM, DCUDFlyer wrote:

    @skypilot:

    I agree wholeheartedly about your assessment. I dont want a website/resource touting only one side of an issue or an investment. I'm seeking guidance through weighing both sides to the issue and attempt to make an informed decision based on my needs and risk tolerance.

    I'm considering initating a position in MCD near the end of the month; expensive yes, but I'd rather get in now than not get in at all.

    I've held NLY for about 2 years, the stock price has depreciated some but the dividends are nice and gives me some exposure to real estate. I may add to my position at these current prices.

  • Report this Comment On December 22, 2011, at 10:27 AM, mikecart1 wrote:

    MCD is solid but they give a worthless dividend

    YUM is solid and even better than MCD. I've been to several countries this year (including Asian ones) and I see a lot more KFC's and Pizza Huts and have not seen a single MCD anywhere in the Asian countries I went to.

    NLY is one of the top 10 stocks in the entire market. For anyone doubting me, check out this smile on my face:

    :o}

  • Report this Comment On December 22, 2011, at 2:43 PM, sept2749 wrote:

    I don't want to chase a big dividend for a year or so and then worry like hell if I'll be able to unload it when everyone else is doing the same - not for me. I like to sleep real easy at night.

  • Report this Comment On December 22, 2011, at 9:20 PM, Hawmps wrote:

    @ mikecart1:

    I have to completely disagree that MCD's dividend in worthless. The dividend has been increased on average, repeat... average of 26.5%per year for the last ten years. The last increase was from $2.26 to $2.80 and has almost tripled from 2006 when it was $1.00 and is more than 10 times greater than 2002 at $0.235. How do you increase your income 26.5%/year?

    You pay a premium for MCD and there's a reason for it.

  • Report this Comment On December 23, 2011, at 1:08 PM, phoebe44 wrote:

    HUH??!! Anyone else confused about the title of the article and the contents??? They're totally unrelated!

  • Report this Comment On December 24, 2011, at 7:40 PM, iPhoned wrote:

    Musical Chairs...the only real Fool is the last guy holding worthless paper when the market collapses again. Be sure not to be the sucker without the chair in the end!

  • Report this Comment On August 21, 2013, at 1:34 AM, emanblue wrote:

    Jim,

    You really missed on these for 2012.

    None of these recommendations are panning out for the year while KMB is at least beating the S&P.

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