Dividend Growth Formula, Stock Picks from David Peltier

Read the companion article from TheStreet.com: 2 Dividend Stocks Offer Stability, Growth.

TOM HUDSON: If there’s one strategy stock investors have been flocking to for more
than a year now, it’s a payback strategy. That brings us to tonight’s “Word
on the Street,” — dividends. David Peltier is back with us, portfolio
manager at thestreet.com. David, always nice to see you, welcome back.

me, Tom.

HUDSON: With interest rates continuing at historic lows, the Federal
Reserve meeting this week, does the dividend stock craze run the risk of
actually hurting investors it’s so popular?

PELTIER: I’m going to take the other side of that. I think actually
the dividends can still help. We’ve already seen really solid gains in the
market in January. S&P is up about 5 percent or so. But I really expect
just moderate gains this year going forward. So with that in mind, you want
to diversify and make sure you have some dividends in your portfolio to add
that extra income.

HUDSON: All right and you’ve got kind of a quick back of the
envelope formula on how to judge the stability and the ability to grow
dividends. What is it?

PELTIER: Historically the companies in the S&P 500 have paid about 50
percent of their earnings out in dividends. So I look for two times
earnings coverage. So if a company pays about a $1 dividend, I want to see
earnings of at least $2 a share.

HUDSON: So you look back on the annual reports to find that. A
couple of those that meet that requirement, we’ll begin with the
multinational drug maker Pfizer (NYSE:PFE), PFE the ticker symbol, yielding
about 4 percent, twice what the U.S. government Treasuries are yielding for
10 years. What about the future growth of the business though? Is it
enough just to buy it for its dividend yield?

PELTIER: Companies actually growing. I think this is the first time
in the last decade that the branded drug companies, you actually like the
fact that their pipelines are very strong versus the generics. So the
company just raised its dividend back in December. I think this company
can continue to grow. Even though the stocks is at a 52-week high, I think
you can make a double-digit return on this stock in 2012.

HUDSON: Pretty significant. But what about the ability for this
company to continue to fund acquisitions or research? Could that take
away, drain money away from potential future dividend growth?

PELTIER: At some point yes but when you look at the balance sheet,
the company has an A-rated balance sheet by all the major credit agencies.
I think that’s very strong going forward.

HUDSON: All right, you also like utilities which was really the
trade back last year. Duke Energy (NYSE:DUK) your choice here at $21 and
change, yielding 4.7 percent. With the big rally we saw last year, are you
late to the party?

PELTIER: A little bit, yes. But when you look at the market, this is
the most oversold sector in the whole entire market right now. When I look
at Duke, I really like the 4.6 percent dividend yield. And really, this is
a company that will grow above average earnings relative to the rest of the
group. So I think the company can raise its dividend once again coming
this summer.

HUDSON: A stock like Duke in that sector, utilities known to pay
dividends, after that nice run that we had last year in this space, what’s
a good yield that you are looking for to protect against a potential
pullback in the stock price?

PELTIER: Again, the balance sheet is very safe here so you get a good
4 or 5 percent yield. I think you can double that move in the stock and
again get a good double-digit return with relatively less risk. That’s the
key here.

HUDSON: And coming off a year where we saw an unchanged year overall
for the S&P 500, not bad, huh? How about disclosures? Do you have
positions? Can you have positions, David?

PELTIER: I cannot and I do not.

HUDSON: You can find David’s article at thestreet.com, a link on our
web site as well. It’s “Word on the Street” tonight with David Peltier with


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