The Best Dividend Stocks of 2011

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At the end of last year, I chose three dividend stocks I thought would be solid performers for 2011. A little more than halfway through a bumpy 2011, we find that these three picks on the whole are beating the S&P and offering up bigger dividends while you wait.

The three dividend stocks are Frontier Communications (NYS: FTR) , Altria (NYS: MO) , and Annaly Capital (NYS: NLY) . Each pays a huge yield, ranging from Altria's 6% to Annaly's 14.5%. I selected these fat dividend stocks because of their ability to lead to solid total returns over a long period of time, as I explain here.

While these stocks haven't been without their own stumbles in the recent market meltdown, Altria and Annaly have held up well. Frontier has been taken to the woodshed. Still, an equal weighting of these stocks would still be outperforming the S&P.

Company

Yield

Dividend-Adjusted Performance (YTD)

Frontier

10.8%

(25.2%)

Altria

6.0%

5.4%

Annaly

14.5%

7.1%

SPDR S&P 500

1.9%

(5.2%)

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

If averaged across the three picks, this portfolio is down about 4.2%, still outperforming the S&P so far this year by a full percentage point. The portfolio also offers a higher yield. I still think this grouping is a solid place for money, and I added my own cash to Annaly and Frontier in what I call the world's best dividend portfolio.

Part of the thesis for selecting Frontier was that its meaty dividend would allow it close the pricing gap with lower-yielding peers Windstream and CenturyLink (NYS: CTL) , whose yields sit at 8.4%. In fact, the reverse happened, with Frontier shares off 25% since the start of the year, more than either CenturyLink (-22.5%) or Windstream (-11.5%). With the drop, Frontier and its huge yield look as attractive as ever.

While the stock sold off following Frontier's recent earnings report, which fell a penny short of the Street's expectations, the CEO noted that cost savings of integrating its recent acquisition of Verizon lines were running ahead of schedule. In fact, she bumped up her estimates of annual savings to $600 million. And the free cash flow payout ratio was 77% for the quarter, a little above last quarter's 74%. That's still reasonable for this type of company.

Altria had its usual quarter, fighting out a market-share battle with other domestic tobacco players and remaining quite profitable in the process. While investors appeared less than thrilled with the 6% increase in earnings per share, the story here is about compounding dividends over time, and this king of American tobacco has more than a few puffs left. Altria's higher current dividend is the trade-off you take for slower growth. If you're more inclined to heady dividend growth in exchange for a lower (but still sizeable) yield, then you might like Altria's spinoff, Philip Morris International (NYS: PM) , which shoots off a 3.8% yield and has substantial growth opportunities in emerging markets around the world.

As for Annaly, the conditions for it to flourish -- low interest rates -- continue unabated. In its most recent quarter, the company reported an interest spread of 2.45%, up 28 basis points from last year's quarter. That's a feat that peers Armour Residential REIT (NYS: ARR) and Chimera Investment (NYS: CIM) weren't able to accomplish in the quarter, as their spreads were down 4 basis points and 51 basis points, respectively. But conditions look great for all these players in the mortgage REIT space, as the Federal Reserve has promised near-zero rates until mid-2013. That should allow them to keep pushing out their massive dividend yields. So it looks like Annaly might be on 2012's list of best dividend stocks, too.

Foolish bottom line
So that's where things stand with these dividend dynamos about halfway through the year. Looking for other great dividends? I invite you to take a look at 13 other dividend stocks in a free report from The Motley Fool called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this special free report, and now you can access it today at no cost. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

At the time this article was published Jim Royal, Ph.D.,owns shares in Frontier and Annaly.The Motley Fool owns shares of Philip Morris International, Chimera, Altria, and Annaly.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris International . Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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