The Best Dividend Stocks of 2011

In December, I chose three dividend stocks that I thought would be solid performers for 2011. Two months into 2011, after they've reported earnings, I'm taking a look at how they've performed compared to the S&P.

The three dividend stocks were Frontier Communications (NYSE: FTR), Altria (NYSE: MO), and Annaly Capital (NYSE: NLY). Each pays a huge yield, ranging from Altria's 6.2% to Annaly's 14.6%. Those big yields also mean that you're not likely to see as much capital appreciation as you would with fast dividend growers. But I selected three high dividend payers because big current yielders are more likely to outperform fast dividend growers over a fairly long period of time, as I explain here.  

So how have they performed thus far compared to the S&P?

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

With the exception of Frontier, these players are in the ballpark of the S&P's return for the year. Most of Frontier's year-to-date 15% price plunge occurred after it reported disappointing earnings earlier this week. But dividends are such a huge part of these companies' total return profiles, and each business has yet to start paying its 2011 dividends.

In December, I liked Frontier better than peers CenturyLink (NYSE: CTL) and Windstream (Nasdaq: WIN) because it offered a higher current yield and still looked underpriced relative to those rivals. That's still the case, but these three wireline players have declined in price recently and now yield a good bit more than they did at the start of the year. While Frontier's earnings have been roughed up by integration costs, the company still generates ample free cash flow and predicts plenty more for 2011, so its meaty 8.8% yield should be safely covered. But this declining space is still tough for all the players.

It's the same old stuff for Altria. While the stock is even for the year, it has yet to start its 2011 payouts, since its most recent distribution in early January had a record date back in December 2010. Its flat year-to-date return belies its solid operating performance, as my colleague Colleen Paulson explains here. In its most recent quarter, the company saw adjusted EPS growth of 12.8% and projected 6% to 9% more EPS growth for this year. Oh, and another $1 billion stock buyback. What's not to like?

And then there's Annaly. Its flat year-to-date performance is to be expected given its massive dividend. You have to accept that all your return is going to come from that 14.6% yield. Its quarterly dividend is down quarter over quarter and year over year, and its interest rate spread declined from 2.79% to 1.85% year over year. Those are not such encouraging signs, but the company recently raised $1.3 billion in capital (before expenses) in a secondary offering, so it's still seeing a place to put money to work, which should help keep the yield up in the short term.

So that's where things stand with these dividend dynamos after the first earnings reports of the year. If you're interested in other dividend stocks, I've recently started picking up shares of another big dividend payer, as I detail here. And here's a way to play the dividend game that's free money.

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