The Top Five Dividend stocks for 2007

Here are some facts for you: If you had invested $2,000 in Pepsi 25 years ago, you would have started with 80 shares. Today, you'd have 2,800 shares and your investment would be worth more than $150,000 if you reinvested your dividends. We could go on and on with more "if you would have invested..." stories and make you feel worse for not being rich, but let's just get to stocks that have potential.

How can you not take advantage of Dividend paying stocks in your portfolio? There are a million reasons why you should, but yet some investors neglect dividends completely. Dividend stocks regularly beat the market with a lower risk than regular stocks. Investors are more likely to hold a dividend stock through a bear market. Plus, there are the tax benefits to think about as well.

If you're ready to join the enlightened investors that use the power of Dividends to make big cash in the long term, the Stockmasters have picked five dividend stocks that we think could pay off in 2007. Here they are, in no particular order:

(Data gathered from Yahoo Finance)

1) Citizens Communications (CZN)
Current Price: 14.34
Dividend Yield: 7.07%
(FCF) 425.50M
Forward P/E: 21.09
Revenue (ttm) 2.18 B

2) Bristol Myers Squibb Co. (BMY)
Current Price: 26.57
Dividend Yield: 4.2%
(FCF) 3.85B
Forward P/E: 21.96
Revenue (ttm) 18.72B

3) Pfizer Inc. (PFE)
Current Price: 26.77
Dividend Yield: 4.4%
(FCF) 8.50B
Forward P/E: 12.28
Revenue (ttm) 52.21 B

4) Caterpillar, Inc. (CAT)
Current Price: 59.25
Dividend Yield: 2.00%
(FCF) 777.63M
Forward P/E: 10.64
Revenue (ttm) 40.18B

5) Home Depot (HD)
Current Price: 40.29
Dividend Yield: 2.22%
(FCF) 7.13B
Forward P/E: 13.85
Revenue (ttm) 90.06B

(Track the ongoing performance of our Top 5 Dividend Stocks at our Portfolio page).

Of all the stocks mentioned, only one is trading on the low end of its 52-week range - that would be CAT. After a huge three year run, CAT lowered it's 2007 guidance and expects it's growth rate to slow down, shares are trading at only $2 above its 52-week low. However there is hope for CAT due to developing countries need for their large engines and mining equipment. Caterpillar has a goal of reaching $50 billion plus of revenues by 2010. All the stocks mentioned here are conservative in nature, but don't get turned away by that, we are not looking for rapid growth, rather long-term investing.

While dividends seem like a magical key to Mo' Money, (nice hat Damon) they can have their pitfalls. If a company is paying too high a dividend that isn't sustainable, chances are it will get cut and bring the share price down along with it. Another factor to consider is not to sleep on value and free cash flow. An investment's total yield depends on both the dividend amount and the stock price. Free cash flow is the true health of a business. Find the companies that produce tons of it. Even in the worst of times, companies with Mo' Money have options. And lastly, have a long-term focus. Many analysts view the world 1-4 quarters ahead of time, when investing in dividend stocks, think 5-20 years.

Dividends provide a significant contribution to U.S. investors' total returns. Since January 1980, the S&P 500 Index has a total return of 2,568.1%. Approximately 56% of the S&P 500 total return was derived from the receipt of dividends (according to Fidelity). B.I.G. Poppa would agree, dividends are the way to go, especially when playing with your 401(k) money. Don't make the mistake of looking for the small cap that will take you to the moon, why waste your retirement savings on risky plays? Speculation is one thing and of course you should have a portion of your portfolio taking risks, but why not put the majority of your retirement savings into stocks that pay you for investing in them? Besides having Mo' Money allows you to be 'flossin jig on the cover of fortune' and you'll have 'the flow down pizat, platinum plus - Like thizat, dangerous - On trizack, leave your ass blizzack'.

Article written by:
Eric Cheshier

Article posted on:
January 17th, 2006

Disclaimer: Eric Cheshier does not own any long or short positions in the securities mentioned in this article. He does however have mad respect for the Notorious B.I.G.