Andrew Bary of Barron's has his pick of the best dividend stocks for 2009 with a yield of 4% or higher. The 20 Best Dividend Plays for 2009

As fat dividends become scarce, here are 20 stocks with reasonably secure payouts of 4% or more. Think cigarettes, drugs and food.

IT IS GETTING TOUGHER TO HAVE CONFIDENCE in the security of dividends, as former payment stalwarts such as Bank of America , Pfizer , Carnival , Dow Chemical , Citigroup and Motorola slash or eliminate payouts.

This year likely will see the largest annual decline since 1942 in dividends paid by the companies in the Standard & Poor's 500 index. S&P projects dividends will fall by 13% in 2009, and the numbers could get worse. "We're taking an optimistic view," says Howard Silverblatt, the senior index analyst at S&P. "If corporations don't see better business conditions later this year, dividend cuts could become more widespread."

S&P, for instance, still assumes General Electric will pay its lofty annual dividend of $1.24 a share, even though many investors and analysts expect GE will have to cut its payout in the second half. The company is expected to barely earn its dividend in 2009 and arguably should be conserving capital to bolster its financial-services unit. With the stock down 28% this year to $11 and the yield above 10%, Wall Street is banking on a dividend cut. GE, the biggest dividend payer in the U.S. at $13 billion annually, accounts for 6% of all S&P 500 dividends.

Given the ugly economic and financial backdrop, there are few guaranteed dividends, especially among financial companies. Dividends at JPMorgan Chase , Wells Fargo and U.S. Bancorp could be trimmed this year. Pfizer recently surprised -- and angered -- many shareholders by cutting its dividend 50% in conjunction with its $68 billion deal to buy drug maker Wyeth . Some say dividends don't affect stock prices, but the Pfizer action suggests otherwise: Its shares are down $3, to $14, since the Wyeth announcement last month.

With money-market funds and many bank accountings paying just 1%, investors are hungry for yield. We are happy to help them. In the table nearby, we have assembled a list of S&P 500 companies that have reasonably secure dividend yields of 4% or more. That is above the index's current yield of nearly 3%.

These 20 companies include Merck , Eli Lilly and Bristol-Myers in pharmaceuticals; Heinz and Kraft in food; Altria , Reynolds American and Lorillard in cigarettes, and Verizon Communications and AT&T in telecommunications.

In putting together this list, we have considered industry conditions, financial strength and dividend-payout ratios, which are derived by dividing annual dividends by estimated 2009 earnings. A low payout ratio is preferable because it means a company has a cushion to pay dividends. Most of the payout ratios are below 70%, with the average at 58%. We have excluded electric utilities, many of which have secure 4%-plus yields.

Two exceptionally high payout ratios belong to Altria, maker of Marlboro cigarettes, and Reynolds American, producer of Camel and Winston brands. Both companies aim to distribute 75% of their profits in dividends. Many investors find the cigarette business distasteful, and the industry domestically is in decline, hurt by falling consumption and higher taxes. Yet cigarettes' addictive nature gives tobacco companies pricing power, even in a recession.

Which dividends are in danger? The nearby table, Too Good to Be Paid?, includes 10 prominent stocks with high dividend yields that may be in jeopardy. The companies include General Electric, CBS and Alcoa . They have high payout ratios or nonmeaningful ratios because they are projected to lose money. These 10 stocks, many of which are down sharply in the past year, could rebound in 2009, but investors shouldn't buy them for their seemingly attractive dividends.

Dividend cuts continue to come fast and furiously. We initially put Harley-Davidson and Dow Chemical on our endangered-dividend list, but removed them after the companies slashed their payouts last week.

The market for S&P 500 dividend swaps, which allow institutional investors to bet on dividends, implies a sharp reduction in payouts this year to a weighted average of $20.50, down from the current rate of about $25 and last year's $28.39. Next year's dividends are expected to be even lower.

WHILE OUR LIST OF ATTRACTIVE DIVIDEND payers includes mostly defensive consumer names, Mattel and Meredith are riskier choices. Toy maker Mattel surprised Wall Street with bad fourth-quarter profits, and Meredith, publisher of Better Homes and Gardens and other magazines, has been stung by the drop in print advertising. Meredith doesn't seem too fazed because it recently raised its dividend -- albeit by a penny a share.

The drug sector is well represented with industry leaders Merck, Bristol-Myers, Lilly and Pfizer. Dividends at all four look secure, although future payout increases could be muted by modest annual profit growth. The new Pfizer dividend of 64 cents annually, for a 4.5% yield, looks safe at just 30% of projected 2009 earnings. The negative investor reaction to the Pfizer payout cut may make other drug makers wary of reducing dividends.

Dividend yields are high in the telecom sector, but payout ratios are lofty, a potential concern. Verizon and AT&T made our list with their 6%-plus yields, but their payout ratios exceed 70% based on projected 2009 earnings. Both dividends look pretty safe. Embarq (EQ), a Sprint Nextel spinoff, has a yield of nearly 8% and a comfortable dividend-coverage ratio of 56%. The risk with Embarq -- and Verizon and AT&T -- is exposure to the declining wireline phone business.

VF Corp ., another name on the list, has a strong balance sheet and markets popular apparel brands such as North Face and Wrangler. Its 4.4% dividend yield looks safe.

Food makers Heinz and Kraft make our list with their 4.8% and 4.6% dividends, respectively. Heinz is expected to boost its dividend in May -- by a small amount. It has an above-average stable of brands and could be a takeover target, as we argued last month.

Kraft has disappointed since its 2001 initial public offering, with the company unable to keep annual profit at more than $2 a share. This year doesn't promise to be any better. Kraft's stock, now 25, could be supported by its bond-like yield. Investors can buy the stock today for less than what Warren Buffett's Berkshire Hathaway paid for its stake of 132 million shares. Berkshire's average cost is $33 a share.

Citigroup and Bank of America have slashed their dividends to a penny per quarter in conjunction with government-assistance programs. Regional banks like Suntrust , Zions Bancorp and KeyCorp also have sharply reduced their payouts.

Wells Fargo and U.S. Bancorp are among the strongest banks and haven't touched their dividends -- yet. Those payouts could be vulnerable because neither may earn its dividend this year. JPMorgan's annual dividend of $1.52 a share is high relative to projected 2009 profit.

THE IMPLOSION IN MEDIA PROFITS is stinging CBS and Gannett , which once had secure dividends. CBS's dividend looks unsustainable given its high payout ratio and debt levels. "It's hard to see a scenario where CBS doesn't have to dramatically scale back its dividend to create more financial flexibility," Bernstein media analyst Michael Nathanson recently wrote.

Gannett, the largest U.S. newspaper company, could be fighting for its survival in the next few years, given industry trends. With its debt yielding 20%, Gannett ought to conserve every spare dollar to repay its $4 billion of debt. Kodak and Alcoa are operating in the red, imperiling their dividends.

GE plans to review its dividend in the second half of this year, and some think the company should act sooner. "It is unclear to us why the dividend hasn't been cut yet," wrote Credit Suisse analyst Nicole Parent last week. "The company is constraining its available cash flow by paying such a large dividend and making it more difficult for it to emerge stronger from this downturn."

If equity returns are muted in coming years, investors holding high-yielding stocks should do well. Historically, dividends have accounted for about 35% of equity returns. Some dividend-paying stocks may seem boring, but there is nothing wrong with that in this market.

The Bottom Line
With the economy contracting, dividends are even more appealing to investors. Yet many are in jeopardy. Reynolds American offers the top yield among our picks.

Company/Ticker/Yield
Reynolds American /RAI/ 8.7%
Embarq /EQ/ 7.8%
Altria /MO/ 7.7%
AT&T /T/ 6.7%
Verizon /VZ/ 6.2%
Int'l Game /IGT/ 5.9%
Meredith /MDP/ 5.9%
Lorillard /LO/ 5.7%
PPG Ind /PPG/ 5.7%
Bristol-Myers /BMY/ 5.5%
Eli Lilly /LLY/ 5.4%
Merck /MRK/ 5.2%
Whirlpool /WHR/ 5.2%
Heinz /HNZ/ 4.8%
Nordstrom /JWN/ 4.7%
Kraft /KFT/ 4.6%
Kimberly-Clark /KMB/ 4.6%
Eaton /ETN/ 4.5%
Pfizer /PFE/ 4.4%
VF Corp /VFC/ 4.4%

Disclosure: The Div Guy owns shares of PFE, BAC, GE, C and USB at the time of this post.

Sam Mamudi of MarketWatch talks with some portflio managers about which health care stocks they like currently. Health-care stocks keeping portfolios in shape

NEW YORK (MarketWatch) -- At a time when stocks are weak across the board, one sector has been strong enough to help mitigate some of the worst losses.

Health-care stocks have performed better than their counterparts in other industries due to steady demand, strong earnings and finances, and expectations of industry consolidation.

While the sector has long been viewed as defensive, it's notable that health care's success comes even as other traditionally defensive sectors have been hurt in the broader downturn.

"There aren't a lot of places where you can put money and be comfortable right now, but health care is one of them," said Dean Kartsonas, manager of Federated Capital Appreciation Fund (FEDEX), which is heavily committed to the sector. "It's kind of the lone wolf."

Other defensive sectors, such as telecommunications and consumer staples, are beset by their own problems, Kartsonas said. Telecoms are under attack from cable operators, while consumer staples have suffered from cash-strapped consumers shunning brand-name goods, and the strong U.S. dollar slow international demand.

Market medicine
Health-care mutual funds are by far the best of a sorry bunch of sector funds, landing in the plus column and leading rivals so far this year as of Feb. 12, according to investment researcher Morningstar Inc. Health-care funds are up 2.8% -- the only domestic-stock fund sector other than technology in the black. Health care's outperformance is due in part to strong demand from an aging population.

"People are hard-pressed to cut out their health expenditures," said Christopher Davis, analyst at Morningstar.

But there are also structural reasons for the sector's improvement. Kartsonas said that while demand helps health-care firms' earnings, these companies also have strong balance sheets and reasonably priced shares. Industry observers also expect an uptick in mergers and acquisitions on the heels of Roche Holding AG's (RHHBY) attempt to buy Genentech Inc. (DNA) outright and Pfizer Inc.'s (PFE) tie-up with Wyeth (WYE).

"A lot of the larger companies have cash, and also drugs that are coming off patent," said Kartsonas. As a result, they're attracted to rivals with a rich pipeline of new products.

Health-care sector mutual funds have lost 16.8% on average in the 12 months through Feb. 12, but that is far superior to its nearest sector rival, utilities funds, which were down 31.4% on average, and also surpasses the 36.5% decline for the Standard & Poor's 500 Index (SPX).

But results are not strong across all areas of the health-care industry.

"Some sub-sectors are less susceptible to recession than others," said Vijay Shankaran, manager of Touchstone Healthcare and Biotechnology Fund (THBCX).

For example, the Nasdaq Biotechnology Index (NBI) was down 12.5% in 2008, while the Morgan Stanley Healthcare Providers Index (RXH), which tracks hospitals and medical and nursing services, tumbled 32%.

"We're staying away from stocks of companies that sell big-ticket equipment," added Rose Ott, manager of Alger Health Sciences Fund (AHSAX).

Ott said she's looking at health-care stocks with less capital-equipment exposure and greater focus on consumables and non-elective procedures -- companies such as Covidien Ltd. (COV) and C.R. Bard Inc. (BCR). Covidien makes commodity-like medical products, such as connecting tubes, she noted, while Bard doesn't rely on one particular product for its revenues.

Bartlett Geer, manager of Putnam Equity Income Fund (PEYAX), said health care is his biggest overweight sector relative to his benchmark, the Russell Value 1000 Index. One of his favorites is Amgen Inc. (AMGN).

"We're excited about their [experimental] osteoporosis drug, Denosumab," Geer said. He said Amgen had been hit with concerns about sales of its anemia drugs, but "those issues have been stabilized." Geer added that Amgen also has no net debt and the stock "represents a growth opportunity."

Touchstone's Shankaran named two drug companies that he likes in part because their products don't "face price pressures." Gilead Sciences Inc. (GILD) has HIV-controlling drugs that aren't the most expensive line-item for patient costs, Shankaran said, while Alexion Pharmaceuticals Inc. (ALXN) has a drug, Soliris, that is the first specific treatment for the rare disease paroxysmal nocturnal hemoglobinuria (PNH).

Shankaran echoed Ott and said he also owns diversified medical suppliers that offer basic items such as syringes and tubes. These companies, such as Baxter International Inc. (BAX) and Becton Dickinson and Co. (BDX), are not only doing better than most of the sector, but also growing revenues. Shankaran said what greatly helps this sub-sector is that hospitals view paying for their products as operating costs, rather than capital costs.

Legislative fears
If there is one cloud on the horizon for the health-care sector, it's the fact that the Democratic Party's control of government suggests reform of the industry is on its way. But managers' opinions are divided about what reform might actually mean for the sector.

Portfolio prescription
"Everybody should have exposure to health-care stocks," said Morningstar's Davis. "But few people need health care-specific mutual funds."

Davis suggested a 5% portfolio allocation to the sector, and noted that investors with diversified stock funds might already be there, especially since many managers have embraced health care.

Disclosure: The Div Guy owns shares of PFE and BDX at the time of this post.

Last week I purchaed a few shares of Target and I will look to add to my postioin over the next few months. I found an interesting article by Glenn Curtin on Target(TGT). Target(TGT) Hits The Mark In A Cloudy Economy

Retail and institutional investors have, over time, kept close tabs on corporate earnings, and for good reason. Companies of virtually all stripes tend to trade at a multiple of their bottom line earnings per share number. Over time, earnings have proved to be a big driver of future share price. Although companies that trade at low multiples of earnings may do so for good reason, trailing price-to-earnings is one tool that savvy investors should use in evaluating a stock.

Low P/E Picks
Let's take a look at a few companies that enjoy low price-to-earnings ratios by using the Investopedia.com stock screener to screen for companies with P/E ratios of less than 10. Based on these numbers, the following companies may be worth a closer look.

Company Market Cap PE Ratio (TTM)
Aetna (AET) $14.8 billion 9.9
BE Aerospace (BEAV) $982 million 4.7
Caterpillar (CAT) $19.2 million 5.2
Foot Locker (FL) $1.2 million 9.1
Target (TGT) $24.6 million 10.0

Data as of market close January 30, 2009

Target Hitting the Mark
With the economy on the skids, consumers have sought to stretch their dollars as far as they possibly can. This trend has driven consumers to to stores like Target, which offer a big selection and lower prices.

The trouble is that consumers may not be shopping quite as frequently or with as much enthusiasm as in the past. In addition, Target isn't alone in its battle for the hearts and minds of the frugal consumer. The fact is it faces stiff competition from the likes of deep pocketed players like Wal-Mart (WMT) and Costco (COST), not to mention the deep discount stores such as Dollar Tree (DLTR) and 99 Cent Stores (NDN).

In my mind, this leaves the company's near-term earnings potential a bit cloudy.

However, over the long haul, this company has some solid things going for it. Its selection and low prices (both alluded to above) are positives that I think will drive foot traffic over time. In addition, the company sports nearly 1,700 stores in some 48 states, which I think has its advantages as well. For one, this makes its stores accessible to huge numbers of people, which plants the seed for future growth. In addition, its diversity/footprint is a plus in that I think could help it mitigate some risk from regional economic woes.

Target is expected to have its Q4 earnings call on February 24th, and investors can only wait to find out how that will play out. That said, the company is currently expected to earn $2.93 for the year, and for fiscal 2009, it's expected to earn $2.68.

Clearly, that's not the direction I'd like to see earnings headed, but I think it's important to note that the stock currently trades at roughly 11.3 times fiscal 2009's estimate of $2.68 per share. And that's not too shabby given that it is also expected to grow at more than 12.6% per annum over the next five years.

Finally, I want to point out that the company has a decent history of giving out dividends. Now clearly, dividends aren't guaranteed, but the annual yield based on its last 16 cent payment is right around 2%. In other words, this is just a bonus for patient investors.

Bottom Line
Companies that sport low price-to-earnings ratios aren't guaranteed to be winners, but I like to screen for these types of companies because many of them have great future potential.

Disclosure: The Div Guy owns shares of TGT at the time of this post.

Barron's has an article by Vito J. Racanelli that profiles Matthew McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel. The Tortoise Wins Again

"WE DON'T LIKE SEXY STORIES, BUT WE DO LIKE consistent ones, especially when it comes to the dividend."

That's how Matthew McCormick, a 38-year-old portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel, describes his firm's approach. It has served the Cincinnati-based money manager well over the years -- particularly during bear markets like the one that now has stocks firmly in its grip.

Founded in 1990, Bahl & Gaynor typically invests its $2.5 billion of assets in blue-chip, large-capitalization growth stocks issued by companies that make stuff people need rather than things they want. These would include Procter & Gamble (PG) and Johnson & Johnson (JNJ). Such companies go in and out of market favor -- as the consumer deleverages, they are in vogue again -- but tend to provide market-beating total returns with less volatility over the long haul, due in great part to steady growth and fat dividends, regularly increased.

For Bahl & Gaynor, flashy but short-lived earnings gains don't cut it. "We're the turtle in the growth area, as opposed to the hare," says McCormick. "Capital preservation is our No. 1 objective. Second, we want to grow, and income is third."

The money manager's philosophy is growth at a reasonable price -- with a little value thrown in. "We are from Cincinnati, OK? We aren't going to overpay...[and] we want companies that can double their earnings every five to seven years, regardless of the economic environment," he says.

B&G also seeks companies that have raised their dividends each year for the past five. Such companies tend to be mature, have been seasoned in recessions and bear markets, and have strong free cash flow and balance sheets, offering a cushion in tough times.

Unlike share buybacks, McCormick adds, dividends hold the CEO's feet to the fire, because they must be maintained "or you get whacked. In our quality-growth portfolio, none of our holdings has had a dividend cut."

Out of a universe of 15,000 stocks, there are only about 250 that fit Bahl & Gaynor's basic template. The investment committee whittles that list down to 45 to 50 mostly U.S. names for clients. It is a low-turnover list, and the Sell discipline is straightforward. A reduction in the rate of dividend growth is "a tremendous signal to us," McCormick says.

Nor does B&G care for mergers. "Managing a company is tough, but integrating another one is increasingly difficult. We would rather sit it out and come back after the kinks are worked out," McCormick says. The firm held shares of Rohm & Haas (ROH), for instance, when Dow Chemical (DOW) bid for it, but sold before the deal ran into trouble.

Bahl & Gaynor's largest and oldest position is a hometown stock, household-goods giant P&G. Consensus sees P&G increasing earnings about 12% for the fiscal year ending June 2010, and sports a 3% dividend yield. Procter & Gamble has raised its payout every year for the past 52 years, McCormick notes. It will face margin pressures and tougher competition this year, but people use diapers, detergents and other P&G products every day. P&G also will be able to expand its brands, he says, noting that "the management team is superior, and they have weathered the storm well."

A more recent pick, with the latest purchases made in October 2008, is McDonald's (MCD), the world's biggest fast-food restaurant chain. It has improved its product offerings while many competitors stood still, and could gain in a recession as people trade down in their restaurant choices. Maybe a steak costs too much now, he says, but a burger and Happy Meal for the kids is a nice break. With McDonald's stock yielding 3.5% and 10-year Treasury bonds around 2.9%, "over a 10-year period, I'm willing to bet that McDonald's is going to be a superior investment," McCormick says.
The second-largest holding is Johnson & Johnson, which looks much like a health-care mutual fund without riskier biotechs and health-maintenance organizations in its portfolio, McCormick says. It isn't just a place to hide, but with the U.S.'s aging demographics and product-patent issues at companies such as Merck (MRK) and Pfizer (PFE), which Bahl & Gaynor doesn't own, J&J is a stock that will keep getting better, he predicts. A 3.2% yield doesn't hurt, either.

Another health-care pick is Becton, Dickinson (BDX), which makes basic medical supplies like drug-delivery systems, syringes, and diagnostic-screening products, "the bricks-and-mortar area of the health-care industry." As such, it isn't in the cross-hairs of politicians. The stock, up 12% since Christmas -- a feat few names have managed, as markets have been dragged downward on the bad recent economic news -- has a yield of 2%.

Generally, Bahl & Gaynor eschews consumer-discretionary stocks, and Best Buy (BBY) and Apple (AAPL), where earnings growth is inconsistent, and the company is more dependent on economic growth and new applications. One exception is footwear maker Nike (NKE), whose stock is down 36% and yielding 2.2%. It does well in a recessionary environment, McCormick says, and "has had the ability to grow its earnings. Kids need shoes, and shoes wear out. Its pricing issues aren't as bad as others'. It is the dominant brand." B&G bought the stock at more than 60 (it's now 48) in the last two years.

One key move that helped portfolio performance last year was the sale of many financial stocks, such as Bank of America (BAC) and Cincinnati Financial (CINF), in the late summer of 2007, taking the firm's position in financials down to an 8% weighting from 22%. Stocks such as Northern Trust (NTRS) and US Bancorp (USB) remain.

Some banks are wholly dependent on government life-support to survive, McCormick says: "It is going to take years, not months, to get off that ventilator." The most recent financial sold was Wells Fargo (WFC), amid concerns about integration risk due to its purchase of Wachovia.

In place of Wells, Bahl & Gaynor bought shares of AT&T (T) and Florida utility FPL Group (FPL) -- another stock up since Christmas -- with yields of 6.7% and 3.4%, respectively. B&G's core philosophy explains the switch: Americans won't be taking out so many mortgages in coming months, but they will need to communicate, and will need electricity and natural gas, too. As a result, earnings streams for both types of utilities are consistent. And while traditionally telecoms and utilities are overregulated, McCormick says, these are safe plays now; certainly in the case of AT&T, regulations will be less onerous than coming financial regulations.

In an uncertain future, the focus should be on quality stocks, says the portfolio manager. Even when the bull returns, he argues, odds are investors first will gravitate to big, stable growth stocks like the ones Bahl & Gaynor favors. At some point, "when we come out of this recession, people are going to drop some of these stocks like hot potatoes" to rush into more speculative names, he concedes.

But unlike those sexier shares, Bahl & Gaynor stocks won't have to make up as much ground to outperform again. Then the next bear market will show, as in Aesop's Fables, that the tortoise still beats the hare.

Except that, in Bahl & Gaynor's case, it isn't a fable.

Disclosure: The Div Guy owns shares of PG, JNJ, PFE, BDX, BAC and USB

According to investing guru Warren Buffett, U.S. stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product. Buffett's metric says it's time to buy

(Fortune Magazine) -- Is it time to buy U.S. stocks?
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.

Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."

Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."

Not just liking the chart's message in theory, Buffett also put himself on record in an Oct. 17 New York Times op-ed piece, saying that he was personally buying U.S. stocks after a long period of owning nothing (outside of Berkshire Hathaway (BRKB) stock) but U.S. government bonds.

He said that if prices kept falling, he expected to soon have 100% of his net worth in U.S. equities. Prices did keep falling - the Dow Jones industrials have dropped by about 10% since Oct. 17 - so presumably Buffett kept buying. Alas for all curious investors, he isn't saying what he bought.