Were These 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. Ten months into the year, these stocks as a whole are trailing the S&P, though they are offering much 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 14.4%. 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.

Company

Yield

Dividend-Adjusted Performance (YTD)

Frontier

12.4%

(31.3%)

Altria

6%

17.5%

Annaly

14.4%

4.9%

SPDR S&P 500

2.2%

3.7%

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

If averaged across the three picks, this portfolio is down about 3%, trailing the S&P's gain since the beginning of the year. Altria and Annaly have held up reasonably well, even beating the S&P despite some overall market weakness recently. But clearly, the big drag on this mini-portfolio has been the abysmal performance of Frontier shares, losing nearly a third of their value.

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.

Yes, Frontier was taken out to the woodshed following second-quarter earnings, and it hasn't recovered since. Though the company did fall short of earnings expectations -- by a penny! -- CEO Maggie Wilderotter upped her estimate of annual cost savings from the recent acquisition of lines. The company now expects $600 million in savings.

Apparently the stock's decline spooked investors enough that the company felt compelled in early October to issue a press release to reiterate its commitment to the annual $0.75 dividend. The dividend comes to a 68% payout ratio on the mid-range of the company's estimated free cash flow guidance. And further synergies are expected to bolster that free cash flow number.

Recall that part of the thesis on Frontier was that its higher yield would lead to a convergence with peers Windstream and CenturyLink (NYS: CTL) . Those rivals have performed much better year to date and still offer 8%-plus yields versus Frontier's 12.2%. Despite Frontier's poor performance, I still think it's an attractive place for money. We'll hear more when Frontier reports earnings on Nov. 3.

Altria just released its third-quarter earnings, and the company shows some of the same issues it's been dealing with for a while. Earnings per share were up a modest 5.6%, amid a backdrop of falling industrywide volume since a 2009 excise-tax increase. Still, the company boosted its dividend by 7.9% and is taking steps to bolster its shareholder returns, namely by creating a new $1 billion share-repurchase authorization and instituting a new $400 million cost-reduction plan. So the company is clearly focused on managing its business in the rough consumer environment.

With its huge payout, Altria is an OK pick for the near term, but long-term I prefer Philip Morris International (NYS: PM) because of its large payout (though not yielding as much as Altria) and its significant growth opportunities abroad. It also doesn't hurt that Philip Morris doesn't have the U.S. litigation risk that Altria does.

Annaly has been hit by concerns that new SEC regulations, declining interest rates, and Operation Twist could hurt the company. The new revisions to the HARP program have also lashed shares of this mortgage REIT and peers such as Chimera (NYS: CIM) . Both are due to report earnings shortly, but we already have some signs that things may not be so bad, in the form of earnings from rival American Capital Agency (NAS: AGNC) . Plus, with ongoing ultra-low funding costs, these mortgage REITs still look attractive, so I'm still very encouraged by my selection of Annaly both here and in my World's Best Dividend Portfolio.

Foolish bottom line
So that's where things stand with these dividend dynamos 10 months into the year. Looking for other great dividends? Consider the 11 names from a brand new free report from The Motley Fool's expert analysts called "Secure Your Future With 11 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. Get instant access to the names of these 11 high yielders -- it's free.

At the time this article was published Jim Royal, Ph.D., owns shares of Philip Morris, Annaly, and Frontier. The Motley Fool owns shares of Chimera, Philip Morris, Annaly, and Altria.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris. 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.

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