When the summer selling was reaching a first climax in August, 24/7 Wall St. released “The Great Dividend Portfolio” for dividend investors who search for both high-yield and some degree of safety through hard times.  Many of these eleven stocks had pulled back in a manner in which they looked very attractive on a risk-reward basis and were paying far more in yields than what we saw from the 10-Year Treasury yields.  What is so interesting about this group of stocks is that many of them never seem to get punished with a bad market.

Low (or no) interest rates are here to stay for at least another two years and investors are being pushed out of the safe debt markets to go find investment income elsewhere.  You are being forced to take on risks for income.  We just showed how the high-yield bond funds and ETFs may have finally hit a floor as spreads reached astronomic levels.

24/7 Wall St. tracks a myriad of dividend stocks and on August 11, 2011 our “Great Dividend Portfolio” was released.  At the time, the 10-Year Treasury yield was about 2.14% and our average dividend yield in the ten-company portfolio was a whopping 5.5%.  That yield is now about 5.3% due to price appreciation and the DJIA has risen about 4% since then.

The high-yield dividend winners are as follows: Altria Group Inc. (NYSE: MO); American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD) or Kinder Morgan Energy Partners LP (NYSE: KMP); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

All of these ten dividend leaders are trading higher than they were in August, and some are up well over 10% and still offer high implied dividend yields.  We are actually approaching levels now where some of these portfolio positions may need to be reviewed.  Our aim is to find dividends which are safe, but we have to also adjust for issues around projected upside to price targets, market performance, and the ability to continue dividend growth even in choppy times.  If we have grown less enthusiastic or more cautious on these names, we have noted at the end of each summary.

Altria Group Inc. (NYSE: MO) was trading at $24.53 on the Great Dividend Portfolio launch date, but that would now be $24.12 on a dividend adjusted basis.  Shares are now up 14.5% from then at $27.63 and the 52-week trading range is $23.20 to $28.13.  Altria is now no longer cheap at 12.6-times expected 2012 earnings (versus 11.2-times expected earnings before.  The company’s return on equity is now listed as 74.8% and the latest dividend yield was 6.0% after a fresh dividend hike.

With Obama and Boehner both being smokers, the hope has been that this ultimate continued-surprise winner is truly immune from Washington D.C.  The state penalty issues have mostly been resolved, with a few exceptions.  Juries seem to no longer award cases for smokers “who got duped into smoking and were told smoking didn’t kill you” in the case.  Altria carries almost no currency risk for its core tobacco business and its dividend has been raised.  It also holds a stake in SAB/Miller.  Our concern is that the consensus price target is only at $28.00.  The second concern is that domestic smoking trends have just finally caught up with the big tobacco companies in America.  We would not chase this one here, but any large pullback may offer another opportunity to get in.

American Electric Power Co., Inc. (NYSE: AEP) remains a top pick in a sector that is no longer looking so cheap.  The reason we still appreciate the value here is that investors are turning to utilities shares as the new version of CD or bond investments.  Shares had just gone ex-dividend in August and it was at $34.27 then.  Shares are now up 12.5% to $38.58.  Its 52-week trading range is $33.09 to $38.99, its market cap is back above $16.5 billion, it trades at close to 12-times forward earnings, its return on equity is now about 10.8%, and the latest dividend yield was is about 4.9%.

Low interest rates work hugely in the favor of power companies.  AEP has a blend of power sources for its client base, it covers millions of Americans in many states, and is still not expensive to the market and to many peers.  AEP regularly hikes its dividend and it always leads the fight against regulations that will cost it too much money.  The company is extremely shareholder friendly.

American Water Works Company, Inc. (NYSE: AWK) remains a top pick for almost all investors.  Shares were at $26.82 at the date of the Great Dividend Portfolio launch and shares are now up 12.2% since then at $30.11.  The 52-week trading range is $23.32 to $31.03 and the company is now above the $5 billion in market cap.  The company’s return on equity is about 6.8% and the new higher dividend yield is about 3.1%.  Technically this is our lowest dividend but remains one of our favorites.

This is the best water stock out there and it is extremely rare that this water utility is off by more than 10% from highs.  The company has already raised guidance and hinted that it can keep raising dividends.  American Water recently embarked on shifting its portfolio in an asset swap.  The company seems to be unstoppable and it has true monopolies in most markets it operates in.  As a utility, it also benefits greatly when interest rates are so low as it can borrow on the cheap to lock in cheap long-term borrowing rates.  With a price target objective by analysts of $32.63 there is an implied upside remaining of more than 8%.  Any big pullback in this stock has proven over and over to be great opportunities to enter.

AT&T, Inc. (NYSE: T) was trading at $27.45 on a dividend-adjusted basis in August and now shares are up “only” about 6.2% since then at $29.17.  The 52-week trading range is $27.20 to $31.94 and the market cap is over $170 billion and shares trade at about 11.5-times forward earnings estimates.  The company’s return on equity is 18.1% and the latest dividend yield was 6.0%. 

AT&T now has both Verizon Communications Inc. (NYSE: VZ) and Sprint Nextel Corp. (NYSE: S) as competitors for the prized iPhone.  A current concern and drag remains the break-up penalty that will have to be paid if regulators do not ultimately clear the acquisition of T-Mobile with a potential $3 billion penalty.  As a large borrower, similar to utilities, AT&T benefits greatly from having such a low interest rate environment.  The good news here is that the consensus price target is above $32.30 and that still leaves close to a 10% implied upside in the shares.

Digital Realty Trust Inc. (NYSE: DLR) is the landlord for technology and IT companies.  Think of it as the only big technology company REIT that pays out almost all of its income as a dividend.  Shares were at $53.51 after deducting the most recent dividend and shares are now up about 9% since then at $58.32.  Its 52-week trading range is $47.42 to $64.25 and the market cap is about $5.8 billion.  Shares now trade at closer to 13-times forward earnings (or FFO).  The company’s return on equity is 6.5% and the latest dividend yield was listed as about 4.9%. 

Investors sit around and analyze technology stocks for their ability to pay dividends over and over, often to no avail.  Rather than taking on the risk of a single entity or even a single sub-sector in technology, consider “Technology’s Landlord” via this REIT.  As long as its clients are not walking away from leases and as long as they are not killing their square footage needs, this digital REIT should bring great virtual dollars for investors.  The company has multiple clients and has many datacenters that it derives its income from, its borrowing costs are cheaper than ever, and there are just ver few ways to generate a yield approaching 5% tied to growth of technology.

General Electric Co. (NYSE: GE) was trading at $14.94 on a dividend adjusted basis in August and the biggest conglomerate is now up 8% since then to 16.14.  The 52-week trading range is $14.02 to $21.65 and the market cap is $171 billion. GE  and the shares trade at about 10-times 2012 earnings expectations.  The company’s return on equity is 11.3% and the latest dividend yield was 3.9%. 

GE keeps gradually turning its ship around and the company was weak during the most recent weakness.  The company looks less and less like a bank stock compared to its past each quarter and it keeps having its customer credit metrics improve.  The company is soon going to pay back Warren Buffett for that 10% preferred stake from the recession and the company has the ability to buy back stock and to gradually increase its dividend through time.  The company’s portfolio is also said to be the best portfolio ever according to management, even if we did recently note that it has a go-along board of directors.

Government Properties Income Trust (NYSE: GOV) is our pick for getting a dividend from Uncle Sam or your local government.  This is the landlord for mostly government office buildings.  The REIT shares were trading at $21.23 when added to this portfolio in August, and shares are up by only 3.4% since then around $21.95 now.  Its 52-week trading range is $20.53 to $28.28.  Its market cap is now just above $1 billion and this trades at less than 11-times forward earnings.  The company’s return on equity is 5.3% and the latest dividend yield was about 8.0%. 

REITs tend to do better in low-rate environments.  Now that the government’s debt-ceiling woes have been resolved, the trust is not facing as high of risks that its federal and local government clients will suddenly not be able to pay their office and property rents.  24/7 Wall St. believes that Treasury yields pay too low from the government, but being the government’s landlord offers a super-high yield.  Our take is that this one has been perhaps overlooked rather than having increased worries. The consensus price target is also $26.17, implying close to a 19% upside with a high yield. 

Kimberly-Clark Corporation (NYSE: KMB) has surged, almost unbelievably as investors buy safety and yield.  This was trading at $61.87 on a dividend-adjusted basis and shares are up nearly 16% to $71.66.  The 52-week trading range is $61.00 to $71.78, its market cap is now $28 billion, and the shares trade at about 13-times.  The gain on Monday now has this one trading above the consensus analyst price target of $71.54.  We think this can make it to $80 longer-term, but we would look to now only enter upon periods of weakness rather than chasing the stock.  The company’s return on equity is 32.5% and the latest dividend yield was is now even down to 3.9%.

This is still the highest yielding consumer products giant, but the risk-reward is currently trading with a real safety premium.  This is a global player so there is currency risk, and the sector is still in the midst of dealing with in-store promotion costs.  We loved the pullback opportunity in August but and we see continued earnings power.  This company is very shareholder friendly and we like that it is not a megacap.  That being said, we would still want to be patient here to see if the stock can be bought on sale.  Despite a lower dividend yield of closer to 3.3%, Procter & Gamble may be better on a share price risk-reward basis today.

Kinder Morgan Energy Partners LP (NYSE: KMP) has been a laggard of late as investors weigh their future in the world of MLPs.  We also caution that the “dividend” is often treated as a return of capital, so the term “yield” is not exactly perfect.  Shares were around $69.00 when added to the Great Dividend Portfolio, and shares are up only 1.5% at $69.94 today.  The market cap is about $23 billion and the 52-week trading range is $63.42 to $78.00.  The implied yield-equivalent here is about 6.6% and the payout keeps rising. 

What makes MLPs so attractive is the tax treatment and the opportunities that lay ahead of the sector.  There are also risks as the politicians are fighting over tax rate changes for wealthy investors.  Kinder Morgan entities are still soft from the highs, but anything under Richard Kinder’s watch has made many millionaires (and some billionaires) over the years.  This is one of the top MLP plays out there.  If investors are being forced to chase yields now, having a solid oil or gas MLP in the mix is a must for long-term investors.  Another great alternative in MLPs is Enterprise Product Partners LP (NYSE: EPD) with an implied dividend yield of 5.9%.

Senior Housing Properties Trust (NYSE: SNH), the well-run REIT for old folks homes, was trading at $20.40 when added to the portfolio in August and shares are now up about 7% at $21.95.  The 52-week trading range is $19.09 to $25.28.  Its market cap is $3.3 billion and the shares trade at about 11-times forward earnings.  The company’s return on equity is about 7.3% and the latest dividend yield was 7.3%.  We also like that the consensus analyst price target is up close to $24.75.

The company has held up despite some peer pressure and despite proposed changes in Medicare and Medicaid reimbursement rates.  It has held up because management here has done well to avoid the pure government-dependent markets in healthcare and senior care.  That situation may have changed as far as a favorable sector look, but this company has held its own.  The REIT has also been able to grow its dividend though time and we expect that to continue here.

Wal-Mart Stores Inc. (NYSE: WMT) was trading at $48.41 when we added this on to the Great Dividend Portfolio in August and now shares are up an unexpected 13% to $54.81 now.  Its 52-week trading range is $48.31 to $57.90.  Its market cap is $188 billion and the shares trade at just over 11-times forward earnings.  The company’s return on equity is 23.6% and the latest dividend yield is now down to 2.7%.  The consensus price target is currently just under $59.50.

Wal-Mart recovered far faster than what we would have expected and it has been impossible to ignore that it pays to be a seller each time the stock hits $55.00.  Wal-Mart still does offer perhaps the greatest dividend of all retailers and that is not going to change.  Wal-Mart was looking like a lost company as recently as August and it still classifies as a value stock by some measurements.  Wal-Mart also has at least a degree of winning in hard times as more of the American public becomes a customer.

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As you know by now, dividend investing is just one mean to an end.  The Treasury bond market offers such low yields now that investors really are hiding in safety rather than trying to make investing income.  The trick is to find companies and sectors that will thrive with earnings through good times and hard times and which also actually benefit from a low-rate environment.

Our first Great Dividend Portfolio had an implied dividend yield of close to 5.5%.  That is closer to 5.3% today but the 10-Year yield is still lower than it was and is currently around 2.07%.

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JON C. OGG

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