Show Me the Money

The S&P 500 is now up a whopping 90% from its March 2009 low. After the last snarling bear market (2000–2002), it took the index 54 months to achieve the gains it has racked up in just 22 months this time. To make the most of the remaining upside in the current cycle, investors should follow some simple stock dividend advice. Every investment you purchase from this moment on should deliver some sort of immediate cash return. We’re past the stage when you could safely buy depressed assets for their rebound potential alone, regardless of whether they produce any income.

Obviously, you want to make sure the payouts of the dividend stocks you buy are sustainable under a variety of stress scenarios. Assuming they are, a generous cash yield offers your best assurance that the price you’re paying is real, not a pipedream. Here are the top dividend stocks to buy for the month of February:

McDonald’s (MCD)

Recommended by: Richard Band, Editor, Profitable Investing

McDonald’s (NYSE: MCD) stands out as a particularly fine value by the “cash now” standard. After touching an all-time high in December, the stock has undergone a normal, healthy pullback, boosting Mickey D’s dividend yield to a respectable 3.2% — almost double the measly 1.8% thrown off by the S&P 500 index.

Why would you bother to buy the whole market via an index fund when MCD yields twice as much and has grown its earnings per share dramatically faster than the S&P (11.2% annually versus 6.9%) for the past 20 years?

I recently padded my own stake in MCD — it’s the largest single stock holding in my personal portfolio — and I encourage you to do the same. MCD has sweetened its payout 34 years in a row. Buy MCD at $77 or less.

Ship Finance (SFL)

Recommended by: Bryan Perry, Editor, Cash Machine

Ship Finance International Ltd. (NYSE: SFL) is the most diversified of all ocean-going cargo carriers. The company operates a fleet of 32 double-hull oil tankers, eight dual-purpose dry/oil tankers, one dry bulk carrier, eight container ships, one jack up rig, three ultra-deep water units, six offshore supply vessels and two chemical tankers. It’s like a quasi-ETF for the shipping industry.

At its current price of about $20 per share with a 6.8% yield, SFL carries a market cap of $1.7 billion with 2011 revenues expected to increase by 14% to $360 million. With a payout ratio of only 46% it’s no wonder this meticulously well-managed company raised its dividend three times in 2010 and is poised to continue raising its dividend payout this year as well. You just aren’t getting that kind of news from 90% of other shipping companies. Shares of SFL traded above $30 in early 2008 and that’s where I believe they will again revisit and represents my one-year price target. Buy SFL below $23.

Merck (MRK)

Recommended by: Richard Band, Editor, Profitable Investing

Merck (NYSE: MRK) is now the world’s second-largest pharmaceutical firm after absorbing Schering-Plough in 2009. The company boasts one of the industry’s strongest research pipelines: 18 compounds in Phase II and the same number in Phase III, the last stages before FDA approval.

Of course, there will be bumps in the road. Merck hit one in mid-January, when an academic overview board stopped clinical tests of the company’s anti-clotting drug, Vorapaxar, for patients with a previous stroke. However, the medicine probably wouldn’t have contributed meaningful sales before 2015, so MRK has time to make up for this setback.

For 2011, I’m projecting a vigorous 12%–14% jump in earnings, MRK’s third consecutive year of record profits. Yet the stock is quoted at only 9 times forward earnings, a drastic discount to the 30 times average during the late-1990s bubble era.

In short, if the market were simply to lift MRK’s rating to undervalued from extremely undervalued, the shares could appreciate 15%–25%. It currently yields 4.5%. Buy MRK at $35.70 or less.

CoreSite Realty (COR)

Recommended by: Bryan Perry, Editor, Cash Machine

CoreSite Realty Corp. (NYSE: COR) is structured as a REIT and is an owner, developer and operator of tactically positioned real estate, intended to meet the strict needs of the information technology community. It is one of the world’s biggest carrier-neutral suppliers of wholesale data center and co-location services, offering private data centers and suites, cage-to-cabinet co-location and interconnection opportunities.

COR went public in the fall of 2010. Since the company is structured as a REIT, it must pay out at least 90% of net income to shareholders who, in turn, must pay ordinary income taxes on dividend income unless the shares are held in a retirement account.

The two Wall Street analysts that cover the stock have the company earning a consensus 98 cents for 2011. That’s a 24% year-over-year growth rate in an economy forecast to grow by 2%. As such, if the company is set to pay out 90% of earnings, then we should see a forward dividend yield of around 6% for 2011, assuming earnings per share of roughly $1. COR currently yields 3.57%. Buy it up to $16.

Western Asset Emerging Markets Debt Fund (ESD)

Recommended by: Richard Band, Editor, Profitable Investing

The closed-end bond fund, Western Asset Emerging Markets Debt Fund (NYSE: ESD), which employs no leverage (borrowed money), is tossing off a handsome 7.3% yield — double the yield of a U.S. Treasury bond with a maturity comparable to the fund’s average of 12.8 years.

Over 90% of ESD’s bonds are denominated in dollars, so you aren’t taking significant currency risk. However, it’s worth thinking carefully about the fund’s credit risk (i.e., the possibility that one or more bond issuers might not pay principal and interest in full and on time).

At last glance, 94% of ESD’s portfolio consisted of government paper. Good enough, but which governments? Brazil, Russia, Mexico and Turkey account for more than half the total. All four have greatly improved their financial standing in the past decade; indeed, the market now views them as better credit risks than Italy! I should add that ESD — like many other emerging-markets bond funds — also dabbles in Venezuela and Argentina (together, about 12% of the portfolio). But that’s part of the game: If you buy these offbeat credits at a high enough yield and the feared default never happens, it’s possible to rake off a spectacular return.

Over the past seven calendar years (through Dec. 31, 2010), a $10,000 investment in ESD has grown to $18,400 — almost three times as much wealth as an S&P index fund has created during the same period. That’s the benefit of getting your “paycheck” (interest) up front! ESD yields 7.2%. Buy it at $18.50 or less.

CPFL Energia S.A. (CPL)

Recommended by: Bryan Perry, Editor, Cash Machine

Hydropower accounts for nearly 80% of all electricity generated in Brazil and CPFL Energia S.A. (NYSE: CPL) is the largest electric utility in Brazil’s capital city of San Paulo. With a market cap approaching $12 billion and an annual growth rate of around 20%, it’s truly one of Latin America’s premier big-cap growth stocks and should provide consistent expansion and steady dividends as the Brazilian story continues to unfold.

Shares of CPL pay in May and again in October. Unlike traditional domestic utility dividend policies that strive to maintain dividend payouts at a stable rate, CPL’s dividend rate fluctuates every quarter in relation to the performance of the bottom line. This makes for a more interesting ride on your capital invested — not knowing how much the dividend will be from payout to payout.

With a stabilized economy under the current political system and growing demand for electricity to support San Paulo’s burgeoning growth prospects, CPL is a high-dividend value stock investors should seek to own on any bouts of weakness. Utilities within emerging markets are steeped in a history of paying out luxurious dividends in order to attract foreign capital. By sporting a dividend yield that varies from 6.5% to 8.5% income investors can revisit owning high-growth utilities during an industrial revolution, similar to the phenomenal returns that utilities provided during the U.S. industrial revolution. Buy CPL under $80.

Telkom Indonesia (TLK)

Recommended by: Richard Band, Editor, Profitable Investing

Telkom Indonesia (NYSE: TLK), the dominant provider of both fixed-line and wireless communications in sprawling Indonesia (population 237 million). As in most countries, the traditional wireline voice business is shrinking, albeit slowly. On the other hand, TLK’s broadband Internet subscriber rolls are estimated to have grown a torrid 50% or more in 2010. Cell phone usage is booming, too. In December, the company predicted it would add 10 million to 12 million new subscribers in 2011, on an existing base of 94 million.

I love TLK’s conservative balance sheet. Net debt to cash flow (EBITDA) stands at a trifling 0.23, versus a median ratio of 1.3 for the global telecom industry. In addition, thanks to TLK’s strong earnings performance in 2010, I look for a plump double-digit dividend increase this year. Based on my projected dividend rate of $1.43 for 2011, the stock currently yields 4.3%. Buy TLK at $36 or less.