The 24/7 Wall St. 2012 Model Dividend Portfolio (AEP, AWK, T, GE, GOV, KMB, SNH, WMT, JNK, AMJ, AMLP, PGF, MO, DLR, EPD, KMP)

It seems that most investors have started adding income or dividend reinvestment plans to their portfolios by using dividend stocks. With the yields of the 10-Year Treasury close to 2% and the 30-Year Treasury close to 3%, investors are looking elsewhere for investment income. 24/7 Wall St. has compiled its own 2012 Model Dividend Portfolio. It has some new names and some deletions from prior dividend lists due to price appreciation or fundamental changes.

It turns out that many stocks with high dividend yields are now more attractive than sovereign debt in the U.S. and abroad. Part of the allure, besides income or reinvestment, is that dividend stocks often hold up better than other investments during jittery markets. It is hard to imagine, but the high-yield utility sector was one of the top performers of the S&P in 2011. In some cases, half of an investor’s total return through time may come from dividends. Warren Buffett generally picks dividend-paying companies for Berkshire Hathaway Inc. (NYSE: BRK-A) after following some of the principles of Benjamin Graham.

The 24/7 Wall St. 2012 Model Dividend Portfolio includes the following stocks: American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); 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).

While exchange-traded products have been avoided in the past, recent trends merit a look at the open-end or closed-end mutual funds and ETF products as follows: SPDR Barclays Capital High Yield Bond (NYSE: JNK); JPMorgan Alerian MLP Index ETN (NYSE: AMJ); ALPS Alerian MLP ETF (NYSE: AMLP); and PowerShares Financial Preferred (NYSE: PGF).

Lastly, there have been some exits due to upside price performance: Altria Group Inc. (NYSE: MO); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD); and Kinder Morgan Energy Partners LP (NYSE: KMP).

We have described the features and outlook for each component of our Model Dividend Portfolio.

THE 24/7 WALL ST. 2012 MODEL DIVIDEND PORTFOLIO

American Electric Power Co., Inc. (NYSE: AEP) returned more than 19% after adjusting for the dividend in 2011, and the electric power player is very diversified with millions of customers in multiple states. It also has a history of hiking its dividend. The stock may be near multiyear highs, but this shareholder-friendly company remains a top pick even though utilities as a class are becoming fully valued. We even called it in 2011: “Utilities are the new CDs.” The stock trades at $40.75, up from our first entrance and still higher than the $39.25 in December when newsletter readers got it. The dividend yield is about 4.6% and the $40.75 price compares to a 52-week range of $33.09 to $40.08 and a Thomson Reuters price target of $41.15. For this portfolio, our target over the next 12 to 18 months is closer to $44 or $45, as this low interest rate climate helps utilities. AEP prides itself on lobbying against many regulatory pressures that would be bad for investors and act as a tax on consumers.

American Water Works Company, Inc. (NYSE: AWK) may not appear to have a massive dividend for a utility, but the 2.9% yield is still attractive considering that you are buying into the largest and best-run water utility in America. The stock is never cheap, and any time it has sold off 10% has been a gift from the gods for investors. With a good yield, a heavily defensive stock characteristic, and a great geographic footprint, this one is suitable for almost all investment portfolios (including widows and orphans). At $31.50, this is well above where we first started recommending, at around $20. The 52-week range is $25.17 to $32.78 and the consensus price target is $34.36, although Gabelli recently said it was worth more than $40. Our target is $35 or so in a normal market over the next year after a likely dividend hike in the summer.

AT&T, Inc. (NYSE: T) went on sale in December as the implosion of the T-Mobile deal required it to pay a $4 billion penalty. Shares have risen from under $29 last month, when this went to newsletter readers, to almost $30.40 now. The Thomson Reuters consensus price target of $31.74 compares to a 52-week range of $27.20 to $31.94. AT&T greatly outpaces rival Verizon Communications Inc. (NYSE: VZ) in the dividend fight and we just noted in our DJIA 2012 OUTLOOK 13,678 target that Verizon was the only DJIA stock trading above its consensus price target. AT&T is cheap, its dividend payout ratio is less than Verizon, it has the highest yield of the entire 30 DJIA components, and it managed to fend off too much defection after losing the iPhone exclusivity. AT&T may rise to $32 or $33 over the next year or so, but that gain does not include a near 6% payout.

General Electric Co. (NYSE: GE) has also appreciated handily from about $16.25 just in the last month, in part because its dividend was raised much sooner than expected. The yield is now about 3.8% and the $18.35 price compares to a consensus price target of almost $21 and a 52-week range of $14.02 to $21.65. CEO Jeff Immelt remains extremely happy with the company’s investment portfolio, GE Capital is looking less like a troubled bank, analysts like its 2012 business mix, and the value remains attractive compared to some conglomerates. GE should attract dividend investment funds up to $20 but we can see this one easily rising to $21 in the near-term under decent circumstances. We can also see a break-out into the mid-20’s more than a year from now if the company keeps paring its portfolio and keeps turning GE Capital into a better outfit.

Government Properties Income Trust (NYSE: GOV) is the stock for investors who want a high interest payment from the government. With rental tenants like the federal government, as well as agencies, cities, counties and on down the line, here is how you get to be the government’s landlord and collect a yield of about 7.2%. Fears for this particular REIT were overblown during the austerity and budget gap talks of the summer and shares have risen from about $21.50 to $22.75 over the past month or so. Still, the 52-week range is $19.68 to $27.80 and the consensus Thomson Reuters price target is over $24. Realistically, this one can go above $25 while still paying out that dividend rate of over 7%. Why loan the government for 2% when you can be its landlord making 7%!

Kimberly-Clark Corporation (NYSE: KMB) has been a Model Dividend Portfolio stock for quite some time and it may be reaching more of a neutral bias near-term because shares have risen another $4 in just the past six weeks. This is a great shareholder-friendly defensive company in consumer products and it has been able to thrive in good times and hard times. At $73, Kimberly-Clark has a 52-week range of $61 to $74.06, it yields about 3.8%, and the consensus Thomson Reuters price target is about $74.35. We expect another dividend hike and at about 14-times expected earnings it probably can still get closer to $80 on a longer-term basis. Higher in-store promotion costs remain more of a concern than commodity costs, but the company has been managing through that for some time now.

Senior Housing Properties Trust (NYSE: SNH) is one of the best run REITs out there and it is in the sweet spot of being landlord to the elderly or aging with growing numbers of retirees at its assisted living facilities, senior homes, and nursing homes. The REIT has managed to avoid the Medicare reimbursement woes, even if it did recently have 10 leases terminated for the end of 2013 when it will have to find new tenants. The stock has risen from $21.30 to $22.20 in recent weeks but that is no worry. The consensus target is $24 and the 52-week range is $19.09 to $24.66. It also trades at a low rate of about 12 to 13 times FFO (EPS for REITs). With a dividend of 6.8%, Senior Housing could rise to as high as $24 to $25 before the valuations start to come up as a concern even though another dividend hike is not likely until late in 2012.

Wal-Mart Stores Inc. (NYSE: WMT) was just featured as one of the least attractive DJIA stocks for 2012. It is not. The confusion arises because Walmart’s stock is trying to stage a breakout to multiyear highs. The king of retail is due for a dividend hike in the near future and that 2.4% yield might soon be about 2.7% or 2.8% again. The company does not exactly need massive amounts of capital for cap-ex, and dividends are better for investors generally than share buybacks. Walmart is a defensive stock now and trades at about 12-times expected earnings. The Thomson Reuters consensus price target is currently $61.70, but Wamart shares may surge to as high as $65 if its chart truly breaks out as it has been signaling.

JUNK BONDS AND HIGH YIELD

Corporate bond defaults are expected to rise somewhat in 2012, but the mutual fund or ETF approach should insulate junk bond investors and the dividends associated with the sector. The trick is to know what you are investing in and to know which high-yield (or junk) funds invest in risky corporate debt and which invest internationally in risky sovereign or agency paper. Junk bonds have recently traded at spreads over equivalent Treasury yields wider than 700 basis points (7%), giving investors yields of 8% or even higher.

The SPDR Barclays Capital High Yield Bond (NYSE: JNK) is the king of junk bond ETFs and aims to track the price and yield performance of the Barclays Capital High Yield Very Liquid Index. Its advisers also have some room to invest in “similar securities” and while some tracking error can exist this product is very liquid, with more than 5 million shares trading per day. It also offers a yield of close to 8%. There are many closed-end funds investing in junk bonds, and this ETF can be used as a substitute or it can be used as a hedge with stock options for many of those closed-end funds. Some of the many closed-end funds in the high-yield bond sector are managed by large firms such as BlackRock, FirstTrust, Helios, MFS, Nuveen, PIMCO and Western Asset Management.

MASTER LIMITED PARTNERSHIPS

Too few investors know much about Master Limited Partnerships, or MLPs. Some regard them as just high-yield oil companies. The payouts are high, but they are distributions with some “return of capital” rather than just all income. That means the tax consequences have to be considered. MLPs generally own pipelines, storage facilitie, and terminals and can be considered “the toll roads and utilities” of the oil and gas sector. Investors view the payouts as a dividend yield, but you should consider it a “yield equivalent” because of the structure.

The two key ETF products in the world of MLPs we track are liquid and have high payouts: JPMorgan Alerian MLP Index ETN (NYSE: AMJ) and ALPS Alerian MLP ETF (NYSE: AMLP) with more than 5% and 6% in “payout rates,” respectively. There are often opportunities in the closed-end funds from Kayne Anderson, Tortoise and ClearBridge that can easily be hedged with put options tracking the exchange-traded products mentioned above.

A RUNNER-UP IN FINANCIALS … PREFERRED SHARES

24/7 Wall St. has not selected a single financial stock for the Model Dividend Portfolio for 2012 for many reasons. The exposure to sovereign debt rating risks, endless attacks by politicians (and the public), lawsuits lasting forever, limited earning power, a lack of carry interest and on and on. Preferred trust securities are generally far safer than picking an individual bank stock these days and they offer opportunities for “widows and orphans” investors to collect high dividends without as much implied volatility in prices.  Trust preferred shares are also generally higher in the creditor line should defaults and bankruptcies ever arise in individual situations.

The PowerShares Financial Preferred (NYSE: PGF) aims to track the price and yield of the Wells Fargo Hybrid & Preferred Securities Financial Index, and it invests at least 90% of total assets in preferred securities in that index. The current holdings as of December 2011 were HSBC (NYSE: HBC), ING (NYSE: ING), Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), MetLife (NYSE: MET) and others. How many bank securities pay 7% in dividends these days? And it is much less volatile than the underlying banks’ common stocks. It trades at $16.35 and its 52-week range is $14.70 to $18.45.

GIVING THE BOOT: STOCKS BEING REMOVED FROM THE PORTFOLIO

24/7 Wall St. has consistently made adjustments to its dividend portfolios. 2011 was an incredible year for those investors who have sought safety rather than aggressive growth. Imagine making more money on stocks that were supposed to be less risky. Some stocks have performed so well that they have been kicked out because of appreciation and some over fundamental changes. Do not chase stocks indefinitely just because they did well before.

The shares removed from the 24/7 Wall St. 2012 Model Dividend Portfolio are: Altria Group Inc. (NYSE: MO); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD); and Kinder Morgan Energy Partners LP (NYSE: KMP). We have given a brief description of each below, as well as what change led to the removal of the stock from the model portfolio.

Altria Group Inc. (NYSE: MO) has outperformed our top expectations and Barron’s just emphasized many of our fears for its cover story to start off 2012. We could become interested in Altria again, but shares may have to get back to $26 or so. While we have some fundamental concerns about case volumes and pricing changes, these probably would be addressed if the price dropped considerably. Currently we are not substituting anything for the tobacco dividends.

Digital Realty Trust Inc. (NYSE: DLR) was a favorite of 24/7 Wall St. due to its high dividend of 4.3% and its shares rose even after we removed it from the portfolio. This is the “Landlord of Technology and the Cloud” and we exited after shares went to $64.50, having passed our $62 cut-off. The price would have to get back down to $58 or so to be reconsidered. Digital Realty is a great REIT and this noninclusion is only because it has performed incredibly well to the point that we cannot chase it. For technology and dividends, we have included Intel Corporation (NASDAQ: INTC) merely as a runner-up candidate after the sell-off. It has a 3.5% dividend yield for those income-seeking investors who insist on having a technology holding.

Enterprise Products Partners LP (NYSE: EPD) and Kinder Morgan Energy Partners LP (NYSE: KMP) have been replaced as the two go-to individual MLP income products due to their price performance, which exceeded our expectations. Enterprise’s price target has been raised closer to $49, but the Kinder Morgan MLP trades now almost $10 above its published consensus price target from Thomson Reuters. These have not been removed because of fundamentals as they are both very well run. We currently prefer the ETFs or closed-end funds in these sectors that include many of the smaller partnerships.

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JON C. OGG