10 Outstanding Dividend Stocks to Buy in This Crazy Market

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In the midst of the August market panic, I wrote about these 10 outstanding dividend stocks.

Category

Company

Dividend Yield

Dividend-Adjusted Return 
Since Aug. 2, 2011

UtilitiesSouthern Company (NYS: SO) 4%9%
UtilitiesWaste Management (NYS: WM) 4%13%
Mortgage REITsAnnaly Capital (NYS: NLY) 14%0%
Mortgage REITsChimera (NYS: CIM) 18%3%
Mortgage REITsCrexus13%6%
LuxuryPebblebrook Hotel3%14%
LuxuryCoach1%13%
MultinationalIntel3%21%
MultinationalPhilip Morris (NYS: PM) 4%4%
MultinationalCoca-Cola3%3%
 
 

Source: S&P Capital IQ.

Why these names? The biggest problem facing the U.S. economy is weak consumer spending. Households have high levels of debt they're still trying to pay off, and people are feeling insecure about their jobs or have already been laid off. Under these circumstances, it's easy to see why they're not spending. And when no one's buying goods and services, companies have more capacity to produce than demand for their products, so they have no reason to hire people.

It's a vicious cycle -- one that probably won't be cured for a long time unless we experience a new technology boom, a surge in exports, or additional stimulus spending to boost demand.

Dividend stocks have been shown to outperform non-dividend payers, especially in bear markets. And there are particular reasons to think these categories of stocks will do well, too: Utilities provide a necessity product and tend to do well in periods of low inflation; mortgage REITs are enjoying strong profit spreads in the current interest rate environment; luxury-goods makers should do well as the wealthy continue to accumulate a greater and greater proportion of our nation's wealth; and multinationals can support domestic revenue with sales from emerging markets.

How're we doing?
On average, the 10 stocks are outperforming the S&P 500 (INDEX: ^GSPC) by a couple of percentage points. That's nothing to sneeze at, but I'm looking for them to outperform over the long term.
Several of our companies recently reported earnings:

  • Southern Company's revenue grew slightly, coming in below guidance because of flat residential and commercial demand. But earnings per share were actually up a full 9%, as costs fell pretty significantly.
  • Waste Management's revenue and earnings per share grew 9% and 14%, because of a mix of higher organic and acquired recycling volumes and a massive increase in recycling prices. Landfill volumes shrunk slightly.
  • Coca-Cola reported unit volume growth of 5%, a slight decline from the 6% growth it had recently been enjoying. Perhaps more concerning was that margins slipped somewhat because of higher commodity prices. So far, that's not something I'm terribly worried about, as Coke's strong brand should give it the ability to pass price increases along to consumers should it need to.
  • Philip Morris grew its volumes by only 4%, but operating income surged 30%, in large part because of strong pricing and product mixes. The company increased its dividend by a full 20%.
  • Intel smashed estimates, growing adjusted earnings a full 33%. The multinational thesis I presented continues to play out -- sales were up 12% in China, 21% in India, 14% in Turkey, and 23% in Indonesia.
  • Annaly and Chimera haven't announced earnings yet, but I'm becoming increasingly concerned about the REIT space. With the Federal Reserve beginning to contemplate bolder action to help the economy and the White House making it easier for homeowners to refinance, a narrower interest-rate spread and higher prepayment costs are likely. Hatteras, a close peer of Annaly, has seen its spreads deteriorate over the past two quarters, though its focus on adjustable-rate mortgages may have made it slightly more vulnerable than companies like Annaly and American Capital Agency (NAS: AGNC) that tend to hold fixed-rate mortgages. And all of these risks are more relevant to residential mortgage REITs than Crexus.

For the most part, though, the 10 outstanding dividend stocks are having a solid earnings season.

Foolish bottom line
The current economic environment may be a difficult one for many companies, but theses dividend payers have some protection from these challenges and, in some cases, could actually benefit from them.

If you're looking for even more dividend stock ideas, I suggest checking out The Motley Fool's special report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." You can download it today at no cost.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned. You can find him on Twitter, where he goes by@TMFDada. The Motley Fool owns shares of Coach, Coca-Cola, Philip Morris International, Waste Management, Pebblebrook Hotel, Chimera Investment, Intel, and Annaly Capital Management and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Southern Company, Pebblebrook Hotel, Intel, Philip Morris International, Coach, Coca-Cola, and Waste Management, creating a diagonal call position in Intel, and creating a write covered strangle position in Waste Management. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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